Investing in only syndications. Am I missing out?

Question

I am an accredited investor who has invested in 2 syndications and looking at a 3rd. However, I am wondering if I’m “missing out” by not investing in direct ownership of smaller properties that I have more control over. I would have a property management run the day to day with whatever I invest in. I am very curious at the STR loophole for tax purposes. I have reached out to a CPA to discuss more on that topic. I would love to hear what everyone thinks. Should I continue to invest/reinvest in syndications or look at STR’s, smaller multi families?

Chris Seveney · Answer

@Brian Baumann

Are you missing out? That depends - if you want another job then buy real estate, if you want to buy time for yourself invest in a syndication

What I would say is I would not only invest in multifamily syndications. While different sponsors, still not really diversifying - it’s like investing in one type of stock company - for example airlines or auto industry. Investing in one asset class and 3 syndicators is like investing in delta, United and American Airlines

If that asset class has a funk, then so do you.

This is a personal preference for you - but owning real estate - especially a str is like running a new business and is not passive

Ronald Rohde · Answer

I only do direct (well, one LP investment) for the control. If I lose my money in real estate, I want it to be my fault, not just sitting by watching some equal idiot make bad or fraudulent decisions.

Ronald Rohde · Answer

Just buy commercial, NNN lease.

All the benefits of direct deals, none of the toilet, trash, etc.

Carlos Ptriawan · Answer

I could make money 20 times faster when I do direct investment rather than syndication.These days actual syndication only gives 9-13% IRR max with potential of being wiped out completely 1:4 prior to covid and it's now 2:6/7 approximately after covid.

not worth it in my opinion but that's my analysis but i do have lot of edge in what i do directly.

Account Closed · Answer

This is a great topic!  I started out as an active investor - but thought I was passive.  I bought SFH through turnkey companies out of state, had a few SFH's locally managed by someone else and bought some small mulifamily properties and had a PM there as well.  I was convinced this was passive investing.  It wasn't. Managing the property managers was a full time job.  A few were OK - more were not.  Very few of my properties cash flowed as I thought they would.  Fortunately for me, I bought my properties in the years where everything was going up and I sold before everything went down. I made money on all of my properties - but not because of anything I did - the market saved me.

Then I found syndications.  Now, I still invest in real estate, but I hire an asset manager and that person manages the property and the property manager.  I still have significant work to do on the front end to vet the operator and analyze the deal - but once I have sent the wire, then I am completely passive.  Of course, I have completely given up control of the asset - that's the tradeoff.  But I am giving control to an expert - someone who has skills that I don't have.  I also hire a plumber when I have an issue at my house, I hire an attorney to draft documents for me and I hire a CPA to do my taxes.  I outsource these things to people who can do it better than me - I could maybe to it cheaper myself, but I have found out that cheaper isn't better.  The lawyering I did drawing up my own legal documents did not turn out well, I can tell you that!

I think if you have time and expertise, then active investing might be for you.  If you don't have time, you won't be successful.  As for the expertise - if you know a market or submarket better than other people or you can rehab a house because of your skills - that gives you an edge and you can be successful.  In my experience, if you don't have that edge, you will likely struggle at active investing and you are better off in syndications.

Twannisha Jackson · Answer

I would love to pair up with folks buying an apartment building, I just put in $5k & get $10k back lol.

Henry Clark · Answer

Looking at your posts, you are just starting out investing.  I would look at your personal residence and lifestyle to dictate your REI method.  If your single or married with no kids, I would look at the following approaches:

1.  No taxes if primary residence for 2 of 5 years.  Your way ahead on any gains, not paying taxes.

2.  Your rent cost, if you're paying is going towards an investment.

3.  You can house hack and improve value.

4.  With the proper Bed/Bath floor configuration you could rent out rooms.

5.  Value add, you might buy a 2/1 and make it into a 3/2 if worth it.  Especially in a sought-after school district.

6.  Could buy model homes in new subdivisions.  Buy at low price.  Value escalates as the development fills out.  Make sure you're not tied into large HOA's if the development flounders for a while.

7.  Buy strategic lots in new subdivisions as they get to around 50% filled and let the lot value escalate.

8.  Do self storage.  Build a small location with a resident managers home.  You live there for free.  Expense your electric, water, sewer, internet, shovel, water hose, etc.  Or do larger Flex buildings and live in one.

The above are still active, but very passive.  Plus, you are totally in control.  And you know the market.

Jacob Gerber · Answer

Funnily enough I have been thinking the same question but in reverse.

Todd Dexheimer · Answer

You're missing out on tenants, toilets, and trash for sure!

In all seriousness, you need to decide how much time you want to spend on a side hustle. Owning your own small deals takes time, even with a property manager will take plenty of your time.

I've talked a lot about active vs passive on my podcast. It really comes down to your goals and how you want to use your time. Ask yourself if spending several hours each week on your rental properties fits in your current lifestyle or future desired lifestyle.

Also, know that small rental properties may look good on paper, but you still have big expenses that pop up and can kill cash flow for years. Perfect example: I have a house that was making $500/month for several years. Then we had a bunch of cap ex (roof, water heater, appliances) all needing to be replaced within a 2 year period. I made no money for those years and it took several years to get back to profit. So, while on paper I was making $500/month, in reality I had 4 years of no cash flow. BTW, this same thing can happen with a syndication.

Happy to chat more about my experiences.

Ronald Rohde · Answer

Keep us updated!

Investing in only syndications. Am I missing out?

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