Your first $50k: SFR rental or LP in a syndication?

28 Replies

Hi everybody,

Newbie here!

My wife and I are in our mid-30s and have careers we love, so I see REI as a way to diversify our investment portfolio and create passive income. I envision myself buying a turnkey SFR rental or two, then getting involved with syndication as an LP, and then perhaps pursuing deals as a GP further down the road. (My line of work is somewhat ageist, and it's likely that my career will begin to wind down 10 or 20 years before I'd otherwise choose to retire. Many of colleagues go into teaching at this point; I'm laying the groundwork for a late-in-life career in REI.)

Lately I've been wondering: should I skip the SFR rental part of the plan?

On the one hand, I want the nuts-and-bolts experience of buying and owning my own rental: researching markets, underwriting deals, dealing with the cap ex and headaches, etc. I'd hire property management, so my involvement would be thereby limited, and my cashflow would be reduced. I'm most interested in the experience (provided I don't lose my shirt and there's the promise of long-term capital gains). My family is financially stable and in no rush, so why not add this notch to my tool belt

On the other hand, why put up with the hassle of a SFR rental when I feel syndication is the better long-term strategy? I could devote these next few months to networking with GPs, reviewing deals, getting experience with due diligence, etc., in the syndication world -- and then dive right into the niche that I see as the better long-term strategy. We're accredited, so we don't have that obstacle to deal with.

To SFR or not to SFR, that is the question. Any opinions would be appreciated. Thanks so much!

I'd do the SFR a syndication is just a REIT with less oversight it is essentially like owning a stock but there is less good reliable information to evaluate first.

Hello @Jonathan Schwartz

It all depends on whether you want to be active or passive and your investment strategy within real estate.

Active with SFR you would have to deal flow, contractors, tenants, and everything in between and make sure that you execute the business plan.

Passively you would primarily have to review syndicators and their deals that they present to you. It would allow for consolidated deal flow, review their track record, and evaluate the business plan.

SFR and apartment syndications have very different risk profiles as well. With SFR if one major capital expenditure or maintenance expense could be absolutely devastating to your profitability and you have all the risk of the investment. Apartment syndications you spread the risk of all the units and if one unit goes vacant, you have other units that can be collecting revenue.

If you have any other questions feel free to connect!

Hi @Jonathan Schwartz There is another option you can try. Have you considered investing in real estate back mortgage notes? You can cash flow passivly without the risk of capital expenditures and the retuns are usually similar or more. If the borrower stops paying the mortgage then you can either foreclose the property and rent it out or you can sell the property and buy another note. If you buy the note at a deep enough discount you'll likely make a good profit either way. I'll be happy to show you some case studies if you want.

@Jonathan Schwartz everyone has made very good points so far. As for my perspective, I think buying SFH or small MF properties will give you a better opportunity for learning the ins-and-outs of REI. Buying into a syndication could give you a good ‘hands off' return, but if your goal is a career in REI as you say; syndication is probably not the best first* step.

*emphasis was put on ‘first’, because syndication could serve you as a great diversification vehicle sometime down the line, so don’t write it off completely.

@Jonathan Schwartz you definitely bring up some valid points on both sides, and I think it will take you really digging into both a little bit to see which you feel more comfortable with. 

On the SFR/Rental side of things go out and meet with turnkey providers, talk with property managers and agents in your target market and really do your due diligence. On the syndication side meet with some GP's, look at deals, and review a few PPM's, etc.

I don't think you'll really be certain until you dip your toes into both and see which one you feel more comfortable jumping into! 

Im also in the Los Angeles area and host some meetups here, feel free to reach out, I would be glad to help any way I can.

@Jonathan Schwartz , I own both single-family rentals actively and invest passively in syndication/crowdfunding. In my opinion both have their advantages and disadvantages, and anyone claiming that one is always better than the other is not looking at the whole picture.

The single-family residential rentals will indeed provide you with a good background of a part of the fundamentals. (Although, this will not be as all encompasing as some might portray, as many types of commercial real estate are very different than SFR). The advantage is that you have complete control and can structure the deal exactly how you want. (For example am very conservative so I buy my properties with no debt. This is not for everyone, as many are much more aggressive and want debt.). So SFR are a core part of my real estate portfolio.

But if I were personally in your shoes, and not able to invest in my local market and having to rely on turnkey, I would not feel as confident with allocating as much of my portfolio as I currently do to it. Again this is me as a conservative investor, and someone who is more aggressive will feel differently. But, my issue is that you have to put a lot of trust in the turnkey provider, and in many cases will not know if that trust was well-placed or not until years later. So I personally would not feel comfortable putting more than a small amount of my portfolio into it.

On the other side, investing in syndications will give you a lot of other advantages. First you can diversify the same amount of money into many properties across different geographies, asset classes and strategies. This is a lot safer than having all your eggs in a single basket are just a few. Also, you can hire someone who has years or decades more experience than you can ever hope to have. The downside is that you have to give up control and you have to feel comfortable with vetting.

Only you know your personal situation (including your risk tolerance and available time). But if it were me, I would go with a small allocation to the turnkey provider , and then in parallel be working on learning how to vet syndications and implementing that as the bulk of my portfolio. Good luck!

@Jonathan Schwartz If you don't know how to evaluate deals you shouldn't be buying into a syndication. IF you only have $50k you shouldn't be buying into a syndication. If you have substantially more than that to invest, (like 10X that much) than putting $50k into a syndication may make sense. But with the rest of your money, you can diversify your investments and include other syndication and some SFH. s

@Jonathan Schwartz

For those who are able to save more than $30k a year or have substantial liquidity (over 200k), I would go straight to being a LP but it might be good to get a few turnkeys.

Turnkeys are 300 dollars if cashflow per property (2 months of work to buy a turnkey rental) you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place but have 1-2 evictions a year and 3-4 big things that happen. Image if I had 30, just 3 x those numbers.

I got 11 turnkeys and realized I needed to make the switch but doing on my own for 5-6 years was valuable.

Let me know if there are any specific questions I can help with. Aloha :)

Originally posted by @Aaron K. :

I'd do the SFR a syndication is just a REIT with less oversight it is essentially like owning a stock but there is less good reliable information to evaluate first.

This isn't remotely true and you really shouldn't be giving advice on something you have no experience on. How is syndication just a REIT? How is investing in a syndication like owning stock? "less good reliable information"?

@Jonathan Schwartz i've been in your shoes before. SFH property investing is not passive and full of headaches. As much as people like to tout how little they work on their rentals, it's small profit when compared to commercial investing. As @Lane Kawaoka said, at best you'll be looking at $300/ month for a turn-key property. If you can invest $50k to $100k in a syndication with a 15% IRR you're looking at a substantially bigger return and it is almost as passive as you can get in real estate.

Good luck!

@Lucas Miller Yeah let's accuse me of being completely wrong and present no evidence showing otherwise, while at the same time not mentioning your conflict of interest as someone who runs a syndication, judging from your profile.

If you would like to discuss why I'm wrong I'd be happy to engage in that conversation.  

There is less reliable information because every website that allows you to trade stocks has all of the publicly available data on those stocks, if there is a place to find this for syndications I'd love to hear about it.

Okay, i'll bite. You are wrong and you're giving advice on things that you've clearly never researched, which is dangerous. I have researched both. Extensively.

 Obviously i'm biased because I do invest in syndications, but that has no bearing on the truth... 

When you invest in a REIT, you buy shares of the company and it pays you dividends from its rental income.

REITs are subject to SEC regulations just like real estate syndications. They have regulations on minimum numbers of investors, ownership share limits, governing regulations, and a few more stipulations.

They can buy publicly traded or private entities. If you have a 401(k) from your employer, there's a good chance you can invest your account into a REIT.

How is this different from an apartment syndication?

Primarily, REITs distribute income as dividends, not as rental income. REIT investors can write off depreciation, but since a REIT is not a pass through entity, you cannot apply paper losses to your other ordinary income. For most HNW individuals this is a deal-killer.

You also cannot 1031 exchange REIT proceeds. Since you own a share of a company, not a share of a property, you can't 1031 exchange your REIT investment returns.

REITs can be a little easier to invest in, but difficult to divest in. I know someone that has tried and it's difficult. There is no minimum amount required to invest in a REIT. You could go invest $100 into a REIT if you wanted to.

They are also more liquid, since they are dividend paying shares, instead of real property. You can get your money out whenever you need (assuming you can sell), unlike a syndication where you usually have to commit your money for about 5  to 10 years.

REITs are diversified over several properties whereas an apartment syndication owns only one property. 

The National Association of REITs has recorded and published a large selection of REIT returns over time. The average annual growth rate of their sample of REITs has been 9.72% over the past 40 years. Absolutely lousy when compared to value-add multifamily syndications.

Lower risk of REITs = lower returns. Slightly higher risk of syndications = stellar returns. As with all investing, the more you can do to mitigate risk the better. Research sponsor, research market, read the ppm, ask for track record on past performance. NONE of these things can be easily done with a REIT.

If you are looking for higher returns and are interested in tax advantages, a syndication could be for you. If you want low risk, don't have the money to invest in a syndication and want slightly better returns than the stock market, go REIT.

Clearly REITs and Syndications aren't the same thing, @Aaron K.

If you feel the need to comment on REITs and syndications again, feel free to copy and paste the above.

@Lucas Miller they are not the same when you compare them on a large scale like that, but for someone investing $50k the depreciation will be minimal.

I see you quoted average returns for REITs but not syndications, my guess is that the data is not easily available. A nebulous promise of "higher returns" always raises my skeptic's hackles. Also as you mentioned syndications are not liquid, it will be much harder to sell if need be than a stock or even a fully owned SFR which itself is not liquid to an extent.

Not all REITs are created equal some trade like stocks and are very liquid, others not so much, however this data is available for people to look at before investing.

I'll grant you that the ability to 1031 exchange with syndications is an advantage that REITs and stocks do not have, but owning individual property also has this advantage.

As I most likely too briefly was trying to get across in my original post is that when evaluating a syndication vs an SFR rental or two. The syndication gives, less control, less certainty (because you may be unfamiliar with the area), less liquidity, with little to no benefits over investing on your own. That is why someone with only $50k might want to avoid a syndication as a first investment.

Originally posted by @Aaron K. :

I'd do the SFR a syndication is just a REIT with less oversight it is essentially like owning a stock but there is less good reliable information to evaluate first.

An individual syndication is nothing like a public REIT...and there is significantly more information and access to the sponsors and the property in a syndication than with a REIT.

I own both direct owned properties and passive syndication investments.  If investors are not adding value, they typically can get similar (or better) returns with syndications than direct owned properties (with much less work), especially in today's market.  One strategy is not better than the other...depends on the investor's opportunities and interests...and market conditions.

@Mike Dymski I know they are not the same thing and I probably should have phrased it better.  Also my point on access to information was more related to information being centralized and easily comparable to other syndications (like stock info is) rather than the individual information available.

@Jonathan Schwartz 

Nobody knows your personal case better than you. So prior to deciding whether to invest passively or actively, evaluate your own bandwidth. Determine whether your bandwidth allows you to handle the work involved with managing the SFR actively! As @Ian Ippolito , be careful as to how much you allocate to TK investing. It may turn into something pretty active down the road.   

Once you're certain you have the time and desire to be an active investor then look into options and see what works. 

The same would apply to passive investing. You don't have to stick with syndications. I'd encourage you to research other ways to passively invest, like being a private lender for instance. Again I'm not saying it's the way to go, but you need to identify and decide for yourself which strategy(ies) will work best for you. It won't mean it is the only strategy to implement. Rather it will entail starting with one strategy, perfecting it and investing through it, and then moving on to add another one to your portfolio. You just have to be patient and plan accordingly.

Best!

Another issue with SFR rentals is that one maintenance issue or vacancy can wipe out months or even a year's worth of cash flow. Unless you plan on scaling your SFR investing, I'd go straight for passive investing.

Wow! This thread went off course a little. LOL!

@Jonathan Schwartz get more education on both and decide for yourself. The best thing you can do is understand it so well that YOU know the right answer for YOU with no question.

My guess: syndication is a better option vs SFR or being a direct operator. :)

@Jonathan Schwartz

I'd skip the SFR world and devote these next few months to networking with GPs, reviewing deals, getting experience with due diligence, etc..., in the syndication world.

A few tips -

*Really get to Know thy partners

*Learn the business

*Be patient 

Align yourself with a great team of Multifamily Operators and go Passive; you can learn as you go using this method!

If I were you I'd look into going Passive in a Multifamily (Apartment Community) Syndication and skip the SFR altogether - No Doubt!!


I hope this was helpful.

Don't hesitate to reach out-

Dino

@Jonathan Schwartz I agree with @Mike Taravella There's nothing passive about solely owning property - in my opinion. I would start with the end in mind and reverse engineer it back. What's most important to you?