$1M to SFHs or Syndications

[Matt Ward]

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.

[John Corey]

Originally posted by @Aaron Taylor:

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.

@Aaron Taylor, well said.

[Kyle Kaldor]

Another thing to consider that @Jay Hinrichs alluded to is leverage. When investing in SFR, most people are using leverage and not buying properties with cash so you could turn your $1MM into $4MM when looking at returns. However, in Syndications (when a limited partner), you are not leveraging your money at all. That being the case, I would think SFR would look more lucrative from a returns standpoint, but would also be a lot more work to actually get that money invested (several deals involved).

[Jay Hinrichs]

Originally posted by @Kyle Kaldor:

Another thing to consider that @Jay Hinrichs alluded to is leverage. When investing in SFR, most people are using leverage and not buying properties with cash so you could turn your $1MM into $4MM when looking at returns. However, in Syndications (when a limited partner), you are not leveraging your money at all. That being the case, I would think SFR would look more lucrative from a returns standpoint, but would also be a lot more work to actually get that money invested (several deals involved).

I suspect that is only true if the syndication paid cash.. but its rare that they do.. they leverage to the hilt they have to   to get the returns.

[Mike Krieg]

I'd lean toward syndications but you need to be very selective right now. Any syndicator can project an 8% Cash on Cash return and a 2X multiple, but it takes saavy and financial analysis to determine the underlying risk. We're in a riskier environment right now. I'm holding some of my residential props, sold a couple others, and am actively involved in several syndications. Many of them are getting too optimistic and there are too many syndicators doing deal after deal because they can, NOT because the deals are great! Buyer beware. 

[John Corey]

Originally posted by @Kyle Kaldor:

Another thing to consider that @Jay Hinrichs alluded to is leverage. When investing in SFR, most people are using leverage and not buying properties with cash so you could turn your $1MM into $4MM when looking at returns. However, in Syndications (when a limited partner), you are not leveraging your money at all. That being the case, I would think SFR would look more lucrative from a returns standpoint, but would also be a lot more work to actually get that money invested (several deals involved).

That is a bit false.

The cash the LPs put in will be mixed with debt on the project. The LPs are getting leverage without signing for the loan.

[Matt Ward]

Originally posted by @Aaron Taylor:

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.

I think there are several answers why a multifamily investment is better than a SFH if priced similarly, although that is hard to do. Economies of scale for one, economic vacancy is another, valuation processes is a 3rd, and so on... also depends on who's asking and answering that question.

Making sure you are putting in your due diligence on the front end is important regardless of the asset type IMO, so that's kind of a wash. In my opinion, you make a considerable amount of money in RE on the buy - regardless of whether or not it's MF or SFH... so assuming that the asset is bought at the right time for the right price.... what is the benefit of SFH investing over MF (to reverse your question)?

I realize my original question might be a bit polarizing, so I appreciate everyone's input!

[Mike Krieg]

Great discussion. I have had SFR's make more $$ than syndications and vice versa. Syndications are nice b/c they are truly passive. But a great deal is a great deal no matter the asset.

[Aaron Taylor]

Originally posted by @Matt Ward:

Originally posted by @Aaron Taylor:

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.

I think there are several answers why a multifamily investment is better than a SFH if priced similarly, although that is hard to do. Economies of scale for one, economic vacancy is another, valuation processes is a 3rd, and so on... also depends on who's asking and answering that question.

Making sure you are putting in your due diligence on the front end is important regardless of the asset type IMO, so that's kind of a wash. In my opinion, you make a considerable amount of money in RE on the buy - regardless of whether or not it's MF or SFH... so assuming that the asset is bought at the right time for the right price.... what is the benefit of SFH investing over MF (to reverse your question)?

I realize my original question might be a bit polarizing, so I appreciate everyone's input!

What would be the advantage of SFH over like a small 8 plex MF when MF is overheated like my example? I guess:

better financing terms

more available options to purchase

don't have to pay any utilities

more flexibility

longer term renters

less tenants to manage

What it wouldn't have is:

ability to scale

can't force appreciation

less renters so even though vacancies are less, the cost is higher

But my primary thing is, if I can buy 5 houses for $500k with 100k down making 8k a year combined, why would I buy an 8 plex 5 or 6 cap where I just break even? With the financing added in, you can't even make money on a lot of MF things that people are buying. I'm sure there are people getting MF off-market deals for cheaper, but that goes for the SFR too.

[Matt Ward]

Originally posted by @Aaron Taylor:

Originally posted by @Matt Ward:

Originally posted by @Aaron Taylor:

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.

I think there are several answers why a multifamily investment is better than a SFH if priced similarly, although that is hard to do. Economies of scale for one, economic vacancy is another, valuation processes is a 3rd, and so on... also depends on who's asking and answering that question.

Making sure you are putting in your due diligence on the front end is important regardless of the asset type IMO, so that's kind of a wash. In my opinion, you make a considerable amount of money in RE on the buy - regardless of whether or not it's MF or SFH... so assuming that the asset is bought at the right time for the right price.... what is the benefit of SFH investing over MF (to reverse your question)?

I realize my original question might be a bit polarizing, so I appreciate everyone's input!

What would be the advantage of SFH over like a small 8 plex MF when MF is overheated like my example? I guess:

better financing terms

more available options to purchase

don't have to pay any utilities

more flexibility

longer term renters

less tenants to manage

What it wouldn't have is:

ability to scale

can't force appreciation

less renters so even though vacancies are less, the cost is higher

But my primary thing is, if I can buy 5 houses for $500k with 100k down making 8k a year combined, why would I buy an 8 plex 5 or 6 cap where I just break even? With the financing added in, you can't even make money on a lot of MF things that people are buying. I'm sure there are people getting MF off-market deals for cheaper, but that goes for the SFR too.
 

I don't think I'd agree with many of your "advantages" to SFH. Financing I'd argue is better in MF (or a wash at most), buying opportunities I'd say is a maybe (market to market - certainly not a major advantage), I pay very little utilities on my MF properties (tenants pay most) so not sure what you mean exactly, flexibility maybe if you mean it's quicker to get out of the asset (a MF sale may take longer) then I'd agree, I don't manage tenants my property manager does and the asset can afford it since its MF.... Your last comments about comparing 5 homes to an 8 plex.... seems like a specific example to fit your argument. I'm also confused about "adding financing in, you can't make money in MF"... I'm not sure I follow. Leverage is a very powerful tool in all RE but especially MF.

To flip your example, what if you invested $100k and got $8k in cash flow a year with larger tax loss kick backs, mitigated risk upon disposition due to forced appreciation, and you didn't have to lift a finger... let the experienced operator do the work.

[Aaron Taylor]

Originally posted by @Matt Ward:

Originally posted by @Aaron Taylor:

Originally posted by @Matt Ward:

Originally posted by @Aaron Taylor:

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.

I think there are several answers why a multifamily investment is better than a SFH if priced similarly, although that is hard to do. Economies of scale for one, economic vacancy is another, valuation processes is a 3rd, and so on... also depends on who's asking and answering that question.

Making sure you are putting in your due diligence on the front end is important regardless of the asset type IMO, so that's kind of a wash. In my opinion, you make a considerable amount of money in RE on the buy - regardless of whether or not it's MF or SFH... so assuming that the asset is bought at the right time for the right price.... what is the benefit of SFH investing over MF (to reverse your question)?

I realize my original question might be a bit polarizing, so I appreciate everyone's input!

What would be the advantage of SFH over like a small 8 plex MF when MF is overheated like my example? I guess:

better financing terms

more available options to purchase

don't have to pay any utilities

more flexibility

longer term renters

less tenants to manage

What it wouldn't have is:

ability to scale

can't force appreciation

less renters so even though vacancies are less, the cost is higher

But my primary thing is, if I can buy 5 houses for $500k with 100k down making 8k a year combined, why would I buy an 8 plex 5 or 6 cap where I just break even? With the financing added in, you can't even make money on a lot of MF things that people are buying. I'm sure there are people getting MF off-market deals for cheaper, but that goes for the SFR too.
 

I don't think I'd agree with many of your "advantages" to SFH. Financing I'd argue is better in MF (or a wash at most), buying opportunities I'd say is a maybe (market to market - certainly not a major advantage), I pay very little utilities on my MF properties (tenants pay most) so not sure what you mean exactly, flexibility maybe if you mean it's quicker to get out of the asset (a MF sale may take longer) then I'd agree, I don't manage tenants my property manager does and the asset can afford it since its MF.... Your last comments about comparing 5 homes to an 8 plex.... seems like a specific example to fit your argument. I'm also confused about "adding financing in, you can't make money in MF"... I'm not sure I follow. Leverage is a very powerful tool in all RE but especially MF.

To flip your example, what if you invested $100k and got $8k in cash flow a year with larger tax loss kick backs, mitigated risk upon disposition due to forced appreciation, and you didn't have to lift a finger... let the experienced operator do the work.

You asked about what I said, and I explained it, but then you kind of went off into larger territory. My point was, for people not interested in doing syndications right now and want to buy smaller multi's, that SFR's are a better value in a lot of markets currently. Maybe not in your market, but I see a lot of that around mine. Bigger multi's are a totally different animal and definitely not what I was talking about. Michael Zuber has been talking about this exact phenomenon going on in his Fresno market on his podcast, so I know it's not just my area.

[Matt Ward]

Originally posted by @Aaron Taylor:

Originally posted by @Matt Ward:

Originally posted by @Aaron Taylor:

Originally posted by @Matt Ward:

Originally posted by @Aaron Taylor:

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.

I think there are several answers why a multifamily investment is better than a SFH if priced similarly, although that is hard to do. Economies of scale for one, economic vacancy is another, valuation processes is a 3rd, and so on... also depends on who's asking and answering that question.

Making sure you are putting in your due diligence on the front end is important regardless of the asset type IMO, so that's kind of a wash. In my opinion, you make a considerable amount of money in RE on the buy - regardless of whether or not it's MF or SFH... so assuming that the asset is bought at the right time for the right price.... what is the benefit of SFH investing over MF (to reverse your question)?

I realize my original question might be a bit polarizing, so I appreciate everyone's input!

What would be the advantage of SFH over like a small 8 plex MF when MF is overheated like my example? I guess:

better financing terms

more available options to purchase

don't have to pay any utilities

more flexibility

longer term renters

less tenants to manage

What it wouldn't have is:

ability to scale

can't force appreciation

less renters so even though vacancies are less, the cost is higher

But my primary thing is, if I can buy 5 houses for $500k with 100k down making 8k a year combined, why would I buy an 8 plex 5 or 6 cap where I just break even? With the financing added in, you can't even make money on a lot of MF things that people are buying. I'm sure there are people getting MF off-market deals for cheaper, but that goes for the SFR too.
 

I don't think I'd agree with many of your "advantages" to SFH. Financing I'd argue is better in MF (or a wash at most), buying opportunities I'd say is a maybe (market to market - certainly not a major advantage), I pay very little utilities on my MF properties (tenants pay most) so not sure what you mean exactly, flexibility maybe if you mean it's quicker to get out of the asset (a MF sale may take longer) then I'd agree, I don't manage tenants my property manager does and the asset can afford it since its MF.... Your last comments about comparing 5 homes to an 8 plex.... seems like a specific example to fit your argument. I'm also confused about "adding financing in, you can't make money in MF"... I'm not sure I follow. Leverage is a very powerful tool in all RE but especially MF.

To flip your example, what if you invested $100k and got $8k in cash flow a year with larger tax loss kick backs, mitigated risk upon disposition due to forced appreciation, and you didn't have to lift a finger... let the experienced operator do the work.

You asked about what I said, and I explained it, but then you kind of went off into larger territory. My point was, for people not interested in doing syndications right now and want to buy smaller multi's, that SFR's are a better value in a lot of markets currently. Maybe not in your market, but I see a lot of that around mine. Bigger multi's are a totally different animal and definitely not what I was talking about. Michael Zuber has been talking about this exact phenomenon going on in his Fresno market on his podcast, so I know it's not just my area.

Fair enough. I guess through my lenses, and I get I'm biased since I'm making the point on the other end of the conversation, a successful syndication or even small MF is a better play than SF for previous reasons (ignoring the outliers). If someone's market is difficult for small multi's, then I'm still having a hard time connecting the dots on why someone sees SFH (at a high level) as a better addition to an investment portfolio than being a LP in a successful syndication. That's all. To each their own and I understand your points.

Now if someone gets excited and really loves managing a portfolio of SFH's, by all means, go for it.  I'm a huge believe in that.

[Pat Marco]

@Matt Ward

With $1mil you will give you 2 choices

Choice 1- Be independent:

You could buy a single tenant building around $3 to $4mil with a long term national retailer that pays NNN with a corporate guarantee for 10 to 15 years

This will give you easily 10% cash on your cash plus principal reduction and no tax due to depreciation etc so you could be making a clear $100k a year with no work

Problem is what happens 10 to 15 years later if Tenant does not renew?

Well, it may not be a problem if the property is in a decent location because you may be able to get another tenant relatively quickly but will pay a hefty real estate commission or you could sell the property vacant hopefully at same price or more due to inflation but again you would still pay a hefty commission

Option 2 - invest in a syndication

My mentor is a syndicator and I invest in his fund that has been in operation for many years

The reason I invest in his fund is because he charges no acquisition fee, no management fee and no disposition fee and anytime I want to cash out I can do so in full within a few months (no long term getting stuck or having to worry about paying fees or commissions etc)

His fund cross collateralizes investors money on several assets in different part of the country with different strategies based on different type of properties - that is how he lasted in the market for many years and has a huge following

[John Corey]

Originally posted by @Pat Marco:

anytime I want to cash out I can do so in full within a few months (no long term getting stuck or having to worry about paying fees or commissions etc)

A specific question. Under what regulation is the syndication set up?

In terms of buying out your position, legally, there are restrictions depending on which registration process was used. 

Independent of the legal / regulatory restrictions, the ability to buy you out is a function of the GP having the cash to purchase back your position. Call it liquidity. The asset class is famous for a lack of liquidity. When there are market forces rather than personal circumstances, liquidity will dry up the fastest. 

[Amit M.]

@Matt Ward your first post was more about SFH is C-D class, no growth, fly over states, and I'd say I suppose multifamily in those locations are probably easier to manage. There are operators out there who know how to make money in those low rent markets. (It's not me, but I've seen it done ;)

And then the discussion evolved to a more general SFH vs MF vs syndications. In that case, it really depends on the market. If you have the ability to invest in high end SFH markets (like prime Bay Area or other costal CA markets) you can make a ton of money on appreciation. AND once those properties appreciate, they cash flow strongly too as rents are at a premium. These are the kinds of markets when a question like "when is the best time to buy real estate in San Francisco?" is answered by "10 years ago!"

So when you're talking about those markets, I do think SFH/condos/2-4's have distinct advantages over MF: better loans (low rate 30 year fixed/no need to refi in 5-7-10 years); much stronger appreciation; usually top notch tenants who are easier to deal with.) Additionally you can usually buy a value added property- renovations, expansions, ADU, etc., to force value early on. Plus ferret out a gentrifying neighborhood at the right time, and that will kick up your property value quickly as well.

I also think that these kinds of SFH/condos/2-4's are also prone to be long term holds, and as an asset class can evolve as an investor becomes wealthier. I know people who quit their day jobs with a small but strong portfolio of prime small properties.

[John Fortes]

The more money you have the more you start to understand and speak the language of investing. We all learn from some place or point. Some with $1MM can do multiple things than the average person jumping into wholesaling with goals to scale up to possibly syndication. 

Once at the syndication level with $1MM, one can either invest passively by seeking those returns you strive for, sign on the debt as a KP with liquidity, or both. 

[Dustin P.]

If I had 1M liquid and no previous REI experience I would pick syndication. If I had 1M liquid I must have some very high level skills already that I use to make a lot of money, and my time would be more well spent doing that then learning a completely new skill set that would be required to be an successful SFH investor