Rental Properties Versus Real Estate Syndications – Which Is Right For You?

You’ve probably seen your home value go through the roof over the last several years. Seeing this, you’ve probably begun to think about how great it would be to own a few extra rental properties and get to enjoy all that appreciation.

Of course, if you actually own single-family homes or even duplexes and triplexes, you know that these investments require ridiculous amounts of time and energy. 

I should know.

I began investing by turning my first home into a rental property. From there, we kept a commercial property as a rental when my optometry practice outgrew the space. Now, we even have several short term rental properties.

What I was actually doing was giving myself another job.

Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Your responsibilities 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 again when your tenant’s lease is up.

Sure, you enjoyed the tax advantages and passive income (if you were lucky enough to have any), but you want more flexibility with your time as kids get closer to leaving the house, or another summer passes you by without taking that dream trip.

Is this the only way to invest in real estate? Luckily, the answer is absolutely not.

I found passive investing in commercial real estate through a wealth mastermind group for high-performing medical professionals. From there, I’ve leveraged this strategy to give myself more of my precious time back while continuing to grow my family’s wealth in real estate.

In this article we’re going to compare investing in single-family homes and investing as a passive partner in a multifamily real estate syndication. 

Why Investing in Single Family and Small Multifamily Rentals Can Be a Lot of Work

Single-family rentals can provide monthly cash flow and even appreciate over time. However, with a single income source (a tenant), these investments can be incredibly vulnerable to any interruption in market conditions.

This type of rental property also requires management, but isn’t at the scale where hiring a property manager makes sense. Even if a property manager can take some of the monthly workload off your hands, they also need to be monitored and managed. 

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 full-time job.

The Case for Passive Real Estate Investments

On the flip side, there are fully passive investments for people like you and me in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s  – Tenants, Toilets, and Termites. Oh my!

According to Forbes, once investors begin to understand passive commercial real estate investments, it’s common for them to move their investments toward syndications. Here’s why:

1. Minimal Time Required

Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold 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 asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.

3. Did You Say Tax Benefits?

Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!

You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation.)

4. 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.

5. Positive Impact

With personal investments, you make a difference in two 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.

Conclusion

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 gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community.

Next Steps

Here at Expedition Equity we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits. 

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