$1M to SFHs or Syndications

41 Replies

Here is a general post to the group, which I'm sure will solicit a variety of responses :)

If you had $1m to invest in either SFH or Syndications, what would you choose and why? I ask because I don't see a lot of high net worth real estate investors buying SFH in Detroit or Columbus for cash flow. They are measuring their IRR and EM goals and deploying capital to operators where they can achieve true risk adjusted returns without being hands on and spending their time elsewhere to make money. This begs the question, is the average BP investor jumping into a SFH investment because that is what is available to them based on capital, and if so, that's totally fine IMO... or is there a population of investors that fundamentally prefer buying SFH in deteriorating economic markets for short term cash flow over the longer term, risk adjusted growth of a successful syndication? Or do some people simply not see the risk of the SFH investment and jump in anyways?

I'm not trying to stoke the fire or say my opinion is the best, I'm honestly curious as to peoples thoughts on this topic

Cheers.

Originally posted by @Jay Hinrichs :

those are excellent points.. I think for the most part a lot of the appeal is for first time investor who has limited capital

Agreed, but would love to hear from some of them on the topic just understand different philosophies.  Perhaps the question(s) are more geared at a "mid-level" investor with 5-20 SFHs that have done well over the last 5-7 years of this up-cycle.... what is keeping them in that asset class?  What is keeping them in Columbus or Detroit or elsewhere?

Again, just very curious and looking to learn.  Not trying to bash!

Think of it this way. 

We all have to start where we are individually. Rarely will people who are working for a living going to splash out $1M for a larger property. We build to that level.

Folks who became wealthy outside of real estate, will use real estate investments as a way to protect their capital. They are not trying to grow their wealth in any dramatic fashion.

When you are a hands-on operator, you can create a return that exceeds the cash you have in the deal. When you are the passive investor is someone else's deal, you are likely the OPM that they needed to create wealth for them. As the passive investor, you can do very well. Just not as well as the operators if the project goes to plan.

I am not saying there is a good or bad way to invest given the original question. There are strategies that make more sense to people depending on where they are in their own journey (desire to invest time, cash available, expertise, alternative ways to spend their time or invest their cash).

The British call this 'horse for courses'. Bring the wrong house to the race and you will do poorly. Bring the right horse for the course type. and things can work out well. 

Originally posted by @John Corey :

Think of it this way. 

We all have to start where we are individually. Rarely will people who are working for a living going to splash out $1M for a larger property. We build to that level.

Folks who became wealthy outside of real estate, will use real estate investments as a way to protect their capital. They are not trying to grow their wealth in any dramatic fashion.

When you are a hands-on operator, you can create a return that exceeds the cash you have in the deal. When you are the passive investor is someone else's deal, you are likely the OPM that they needed to create wealth for them. As the passive investor, you can do very well. Just not as well as the operators if the project goes to plan.

I am not saying there is a good or bad way to invest given the original question. There are strategies that make more sense to people depending on where they are in their own journey (desire to invest time, cash available, expertise, alternative ways to spend their time or invest their cash).

The British call this 'horse for courses'. Bring the wrong house to the race and you will do poorly. Bring the right horse for the course type. and things can work out well. 

Agree with what you said.  Good points.  Looking forward to hopefully more opinions as well!

@Matt Ward I can only speak to what I would do. If I had $1M of money to invest, I would invest in syndication. Likely, if I have that kind of money to invest, I am doing fairly well and looking to step back from day to day involvement. That is my own personal goal. But most new investors don't have $1M to invest. So they must start with SFH (or smaller multifamily), like I am doing right now. Personally, as I amass more properties and wealth over time, I would move away from SFH. I guess it depends on a persons goals.

Investing in syndications will protect your wealth from any market retraction or recession as multi family only has a fraction of the foreclosure or other related issues as do single family residences. The only asset class close to Multi Family in that case is Self Storage. People will flock to apartments and need to store their stuff.

  1. ASSET PROTECTION
  2. WEALTH PROTECTION
  3. HEDGE

The average investor on BP doesn't have $1M, so there is an answer. The average investor on BP doesn't understand the IRR, and that's another answer.

Originally posted by @Ben Leybovich :

The average investor on BP doesn't have $1M, so there is an answer. The average investor on BP doesn't understand the IRR, and that's another answer.

It's a hypothetical to gauge average investor mentality on this platform, and to assess whether SFH is simply the investment vehicle that is available to them in one way or another, or if there is more depth in the thought process that goes into the SFH portfolio investment in mid-west/rust-belt states. Sorry if that wasn't clear enough for you.

Some of it is resources, some of it is confidence, some it is knowledge. 

If you're new and broke, SFR can get you a solid retirement with low resources and fairly low understanding of finance. That's exactly why I started with SFR

Now I'm buying multi because my confidence (track record) has grown, I've spent a few years in commercial underwriting, and my network of resources is much higher.

The single family model was never the better method, but it fit my situation and I think that's the case with a lot of people. Biggerpockets is far more geared towards us new investors so you'll find a skewed voice from participants on the boards. If you spent time in social groups where investors had 1MM in resources to allocate, I'm pretty sure you would find a lot less SFR talk.

Originally posted by @Matt Ward :
Originally posted by @Ben Leybovich:

The average investor on BP doesn't have $1M, so there is an answer. The average investor on BP doesn't understand the IRR, and that's another answer.

It's a hypothetical to gauge average investor mentality on this platform, and to assess whether SFH is simply the investment vehicle that is available to them in one way or another, or if there is more depth in the thought process that goes into the SFH portfolio investment in mid-west/rust-belt states. Sorry if that wasn't clear enough for you.

That's like saying - I am going to gauge an approach to a quantum mechanics problem by going to a bar and polling people. Matt, there aren't likely to be any more people at your local bar with an opinion on quantum mechanics, hypothetically or actually, than people with $1M investable capital and the knowledge base to answer on this forum. 

I have an opinion. @Jay Hinrichs has an opinion. A few others would have an opinion. But, we are such a vast minority here that our opinions are the exception to the rule, more so than the rule.

You are on BiggerPockets, Matt. The land of the newbie :)

I like the question, though, and given another kind of setting, we could have a very interesting discussion.

@Matt Ward fun question.  I think @John Corey and @Alexander Felice hit this on the head. It's very much a function of time (or already established wealth). Having the $1M to sink into a single investment already makes an assumption that wealth preservation will be a factor in that decision. Whereas SFR investments are generally a vehicle for wealth accumulation.

So if it's my only $1M to invest, I'm probably not going to put it into a syndication. $1M not what it used to be.  I'm going to need to grow it and it's not diversified enough for me to sink everything into it.  I'm going to use the funds put some effort into it, assume the increased risk and grow it more than a syndication can offer.

If it's $1M of a 5M+ portfolio, I'm thinking syndication looks pretty good: asset based, diversified and completely passive on my part. I'm putting my feet up and hitting the beach.

Originally posted by @Bryan Hartlen :

@Matt Ward fun question.  I think @John Corey and @Alexander Felice hit this on the head. It's very much a function of time (or already established wealth). Having the $1M to sink into a single investment already makes an assumption that wealth preservation will be a factor in that decision. Whereas SFR investments are generally a vehicle for wealth accumulation.

So if it's my only $1M to invest, I'm probably not going to put it into a syndication. $1M not what it used to be.  I'm going to need to grow it and it's not diversified enough for me to sink everything into it.  I'm going to use the funds put some effort into it, assume the increased risk and grow it more than a syndication can offer.

If it's $1M of a 5M+ portfolio, I'm thinking syndication looks pretty good: asset based, diversified and completely passive on my part. I'm putting my feet up and hitting the beach.

For me and that's because I have a mortgage bankers license and understand HML ing.. I take that 1 mil and get a lending facility of another 4 million and cherry pick loan.. right now the going rate is about 12% to 14% apr.. so make that on my 1 mil so say 120k a year I get a LOC facility for 1 over prime so say 7% to round up I make the delta on 4 million that's another 200k a year.. and I set my loan size at 500k so I only have to do 10 loans a year.. and of course we charge points and interest so if I get an early payoff return can boost to 15% pretty easy.

Some of the big guys are still investing in SFH (just food for thought): https://apple.news/AhTzm0x7-SX...

As for me, I invest in both SF and MF syndication.

I am a new principal/co-sponsor in 124 Unit MF Apartment Complex, co-sponsoring a new build 145 Unit MF Apartment Complex, and am a passive  LP in 410 MF Units. Our goal is 10 SF/year, with 2-3 MF/Commercial investments a year. 

I invest in SF homes, market for distressed properties, force appreciation, refinance/rent or sell... for net worth and liquidity. I view SF as my “active” investments and pull capital out to fund “passive” investments commercial MF investments.

"is there a population of investors that fundamentally prefer buying SFH in deteriorating economic markets for short term cash flow?" This is an odd question. There are certainly people that buy in deteriorating markets, but the large majority that is buying properties (SF or commercial) are aiming for markets with growth and cash flow. Just because they are buying small properties that cash flow, doesn't mean they are buying in bad markets.

Everyone has a different plan and set of goals. 10 single families that are owned free and clear can set you up for a pretty solid retirement. If you want to get rich or build a large company, then commercial property is definitely the way to go. 

Syndication is a good route if you want to be passive. It works especially well if you own a business or have a job you enjoy. If your goal is to be passive, single family or any direct ownership of real estate makes it difficult to be passive.

I don’t think it takes a lot more money to get into 1 or 2 syndication deals, but they don’t allow for quick return of capital, something that is possible on smaller and mid sized deals (refi and roll). 

@Matt Ward

When you mean see do you mean by social

media? I can't tell you how often people

see what they want to see. I used

to think what you think but as I market to

owner operators over the years I can't tell you how often I run into the quietest multimillionaires with generational wealth that are not on podcasts, facebook, bigger pockets and instagram. In fact I would say the majority of investors I run into that invest where I want to be and how with generational wealth are not even on social media because they find it a waste of time and low return on time. Even when I was working in finance my wealthiest clients were always the most lowkey ever. I actually wrote an article called the "Millionaire that greets you at Meijer" which was a story of a woman with millions in her bank account that worked at a grocery store as a greeter in retirement. I personally witnessed it because I was nice to the woman everyday, not even bothering to trying to solicit her business and eventually she told me she wanted to open a bank account before depositing over 2.1 million out of nowhere. What you see is because somebody put it there. What you don't see is wealth is all around you but may not want to be seen.

So being new and definitly not worth a million dollars this is my take. 

From the syndication opportunities I have seen come across my email they are generally 5 years or so in length with CoC average returns of 8%+ per year PLUS and equity multiplier GREATER THAN 1. This to me seems like the best opportunity because effortless income with "appreciation" because of the multiplier payout in the end. Sure, you may not have the depreciation or other tax benefits as a piece of real estate does but you're also not doing much of anything except putting money into a wire transfer and living life.

The SFH option may give you cash flow on a monthly basis and depreciation benefits to shelter some income but if you're in a market that is becoming worse and worse as time goes on, aren't you deteriorating your initial investment base? Doesn't that violate the first rule of investment which is to preserve the initial investment? I mean you could 1031 exchange in perpetuity to keep that base but that is a lot of work and your not really seeing appreciation in the end. You also cant really call your chips back either can you since you would have them tied into 1031 exchanges (without heavy tax implications).

I am def not a finance guy but it seems to me that the capital gains tax you will pay on syndication will likely end with your initial investment principle being multiplied by something greater than 1 plus the cash flow you got from monthly payments. The SFH option will likely end with initial capital being multiplied by something less than one from depreciation recapture and cap gains etc but you have some cash flow...

Again just my thoughts totally new here .

Right or wrong (on the fine details), it was refreshing to hear how you see things @Chris Armstrong . Some of the time I am so close to the details that I do not understand how someone with less history would view the macro details. Thanks for sharing.

Originally posted by @Matt Ward :
Originally posted by @Jay Hinrichs:

those are excellent points.. I think for the most part a lot of the appeal is for first time investor who has limited capital

Agreed, but would love to hear from some of them on the topic just understand different philosophies.  Perhaps the question(s) are more geared at a "mid-level" investor with 5-20 SFHs that have done well over the last 5-7 years of this up-cycle.... what is keeping them in that asset class?  What is keeping them in Columbus or Detroit or elsewhere?

Again, just very curious and looking to learn.  Not trying to bash!

In my opinion, knowledge and experience is what keeps people in that asset class. If you've spent 5-7 assessing specific properties types in specific markets, you've become an expert in the area. You're able to identify opportunities and issues through the experience you've gained. Doing the due diligence on sponsors and comparing syndication deals is another skillset to develop. Not all sponsors are equal, just as not all SFH investors are equal. Another issue is whether a new syndication investor has access to the best sponsor/deals. I think there are lots of reason to stick with what you know (assuming its worked) and it might feel more passive that learning to assess syndication deals.

@Matt Ward My opinion is that when people decide to first invest in real estate they are unaware of syndications and how they work so they invest in something that is attainable for them at the time. That’s how I first started in real estate until I learned the benefits and opportunities of syndications. Now we are fully focused on putting together and investing in apartment syndications.

Originally posted by @Charles Kao :

@Matt Ward

When you mean see do you mean by social

media? I can't tell you how often people

see what they want to see. I used

to think what you think but as I market to

owner operators over the years I can't tell you how often I run into the quietest multimillionaires with generational wealth that are not on podcasts, facebook, bigger pockets and instagram. In fact I would say the majority of investors I run into that invest where I want to be and how with generational wealth are not even on social media because they find it a waste of time and low return on time. Even when I was working in finance my wealthiest clients were always the most lowkey ever. I actually wrote an article called the "Millionaire that greets you at Meijer" which was a story of a woman with millions in her bank account that worked at a grocery store as a greeter in retirement. I personally witnessed it because I was nice to the woman everyday, not even bothering to trying to solicit her business and eventually she told me she wanted to open a bank account before depositing over 2.1 million out of nowhere. What you see is because somebody put it there. What you don't see is wealth is all around you but may not want to be seen.

What I mean by "see" is seeing hundreds of tax returns every year of experienced real estate investors.

My concern with multifamily syndications right now revolves around interest rates and optimistic underwriting.  If rates were to rise even 2% to 3% I'm not sure if any of their refi or exit plans would work due to the next buyer being unable to afford it.  It kind of feels like multifamily syndication is the new house flipping, lol, so many books and podcasts on it.  If I were going to put money into one right now, I'd choose my sponsor very carefully.

Frankly, single family housing seems priced better than multifamily right now.  It doesn't scale, but someone will have to explain to me why an 8 plex 5 cap is a better investment than your usual 1% rule single family house (probably an 8 cap) in the same area.  I see people paying dumb money for returns that don't seem to make any sense.