If you’ve ever owned single family or multifamily homes, you know they can require a lot of your time and energy.
Investing in residential real estate can be challenging, because typically, as the investor, you wear many hats throughout the seemingly never-ending process. Your responsibilities can include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over when your tenant’s lease is up to find the next tenant. When I was just getting into real estate, I remember how excited I was to own a rental property…until I couldn’t find a tenant for it. Then during a 6-month vacancy, I had to make the mortgage payment out of my savings. Not quite as exciting as I expected! (I could have prevented that, but back then I didn’t know what I didn’t know.)
Why Investing in Multifamily Rentals Can Be a Lot of Work
Small multifamily rentals have some advantages over single family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each.
But even with a property manager
on board to help with your rentals, bookkeeping, strategic decisions,
and maintenance/repair costs are
still in your court. You’re basically running a small business, which can
be challenging if you’re working a
The Case for Passive Real Estate Investments
On the flip side, it’s possible to make fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the “three T’s” – Tenants, Toilets, and Termites!
When I found out about the power of syndications (especially for larger multifamily apartment complexes), and that people just like me invested in them, I was hooked! I decided quickly I wanted to get into investing as part of the sponsorship team.
But while I learned how to do that, I invested passively, and I still make some passive investments today. In fact, that’s a common path for those who aspire to sponsor syndications someday.
According to Forbes, once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:
1. Minimal Time Required
Are you familiar with the phrase, “set it and forget it?” In a syndication, you put money in, collect cash flow during the holding period, and receive profits upon the sale of the property.
You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.
2. Opportunity for Diversification
It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets.
By investing with experienced deal sponsors, you can easily diversify into various markets and market segments (e.g., multifamily, mobile home parks, and self-storage) with assurance that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.
3. Great Returns
Investing in apartment syndications pays you cash flow from the start of the investment through the holding period until sale. It’s always great to see this “mailbox money” arrive in the mail or be deposited to your bank account!
Then the real payday happens when the property is sold or refinanced and
the proceeds are distributed to the investors. Then there’s one more direct financial benefit, which involves taxes.
4. Tax Benefits
Similar to personally owned rentals, you get pass-through depreciation when investing in real estate syndications. You can usually write off most or all of the quarterly distributions, which means you basically get tax-free passive income throughout the holding period. Score!
You will, however, likely owe taxes on the appreciation (i.e., capital gain) you
earn upon the sale of the property.
Note: Different investors who invest the same amount in the same deal can
have different tax consequences based on the rest of their financial situations
(e.g., other investments, jobs, etc.). Always check with your own CPA on your personal situation.
5. Limited Liability
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.
6. Positive Impact
With personally-owned real estate investments, you make a difference in one to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities
with just one deal.
Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial
real estate syndications.
Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. It also gives you an opportunity to have a positive impact on the families who live in your units, as well as a positive impact on the environment
and the community.