Passive syndication investment vs other REI options

17 Replies

Before I pose my question, let me start off by saying that I completely understand every RE deal/strategy is different and each comes with its own pros/cons, as well as your own personal goals/desires, etc, etc, etc.

So in a very generalized sense, if a would-be real estate investor has the option to start investing in SF/small MF RE, or being a passive investor in a larger syndication deal... which one typically is better (ie better returns on your investment)?

The reason I ask, it seems there is a natural progression to start with SF, move up to small MF, and then larger MF, etc. But for someone who is starting out and has the options to start down any one of these routes... would one typically get a bigger bang for ones buck in the larger syndication deals? Especially if the syndication deals tend to also employ a similar BRRR type strategy.

Any seasoned opinions are welcome as I am really weighing my options.

Thanks!

@Scott Price Since you said it yourself that you "...completely understand every RE deal/strategy is different and each comes with its own pros/cons, as well as your own personal goals/desires, etc, etc, etc." I don't think you should ask for advice, Rather ask others to share their personal experiences. Then you can take these personal experiences and customize for your own good. As you said, each personal situation is different. So what worked for one may not work for another. 

Now in terms of the returns, when someone is actively engaged in real estate (eg., as a landlord or a flipper or anything else) their returns over time are higher versus being passive (e.g., through a syndication). However being passive in syndications may work for someone busy with other activities, say flipping and generating enough cash to reinvest and to continue flipping.  So again, you need to decide for yourself what area of real estate you want to concentrate on first - get educated in it and start doing it, then pick up the next niche in RE and do the same, and so forth. But again, it all depends on your personal situation. All of it involves learning curve, including syndications. 

Happy to chat more offline if you'd like. PM me if interested.

Best!

I own ~2000 units and started off with one duplex. I've spent countless dollars learning lessons the hard way and now have nearly 40,000 hours of real estate experience under my belt. I took this less traveled path so that I could grow a real estate management biz and further dovetail into syndication of large apartment communities.  If you're looking to do the same then I say go for it!

If you don't like losing money and want to simply get yield on your hard earned capital then do it passively with a professional.  Determine if you're an investor or an operator who also invests. It's two vastly different paths.  For most,  they should focus on income streams outside of real estate that can be increased and funneled into income property.

All the best!

Hard to say what would work.

Each individual has a different risk tolerance, amount of being passive versus active, needs cash flow today versus more equity growth on the back end, certain time horizon to stay in the investment,etc.

Only the individual can decide what is most important and the best fit through research and self discovery.

For me as a syndicator and sponsor I like deals where there is big equity gain on the back end for my investors and myself. Cash flow is nice but by itself does not mean that much to me as I make great cash off of transacting commercial real estate deals as a principal broker with my clients.

Some investors need large cash flow returns day 1 and others can wait awhile as they make tons of cash from their job or businesses.

In those cases they tend to focus more on IRR over time. Any syndicate you invest in you need to analyze that asset class and see where it is in the cycle period. Example if a syndicator is projections the same gains for multifamily they bought 3 years ago and just exited the next one might be in the middle of a down cycle and they might not be able to hit those projections. Watch out for syndicators that puff numbers and syndicate deals to grow doors or sq ft fast taking fees each time.

   

@Scott Price hard question to answer as others have suggested it sort of depends on you personally. I do all of the above and a few other types of investing because I just find it all interesting. A key question you need to answer is how active do you want to be? You can make very high returns flipping houses but it takes a lot of time and learning.

I generally find that investments I do personally have higher returns because I have total control and no one else is participating in the profits. However, I have a lot of experience and if you're just starting out you should assume you'll mess up the first few deals you do.

Also, I'm in a position where I want to transition to being less active so I'm slowly transitioning into things like Syndications, Funds and REITS. I expect them to return less than I can do personally but it's worth it to me to free up my time.

But I doubt I will ever stop directly investing in Real Estate because I just enjoy it and like to stay busy.

So, you can see, it's kind of a personal decision. Maybe try both and see what you enjoy. Buy a duplex and invest in a syndication and see which fits you better.

@Scott Price

After over 1000 strategy calls with investors and coaching clients over the past couple years here is what I tell W2 employees... For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool/good for you... but just remember why we got into this... To be free from a JOB. If you invest the right way you (as a working professional) will be financially free in 4-7 years pending taking action. So I always urge people to start with the end in mind and take a more passive approach.

Do the math here… you with 300 dollars 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.

Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

Thought I'd share my experience because I had a similar dilema. I have a career that pays nice 6-figure income and enjoy real estate investing as a profitable hobby that takes me out of the daily grind. I own several cash-flowing SFR's and have flipped a few home. More recently, I moved my 401K from my company into a self-directed fund and have been investing in syndicated investments on CrowdStreet. I've invested in MFR, office buildings and even a hotel and have learned a ton just listening to the offering webinars. Recommend checking those investments out if you qualify as an accredited investor.

I have grappled with this question for a few years: Which strategy is better - investing in SF/small MF on my own or investing as passive investor in large syndicated deals. In my opinion, there is no straight answer. I started by doing a little bit of both. That allowed me to wet my toes and got me some diversification and education. Early on, I thought that as I collected actual performance data in my portfolio, I would be able to pick one over the other in 3 to 5 years. I am at 4 year mark now and my views have evolved over this period. I will be using both approaches for the time being.  

What I have realized is that each approach comes with its own risks and rewards. I like syndications because they are true mailbox money. But at the same time, you rarely come across folks who got very rich by investing  in syndications. They actually are already rich before they decide to invest in syndications. On the other hand, the real estate that you buy yourself, if bought in a thoughtful  deliberate manner over long periods of time, can actually make you truly rich.  

RE Investors will hate this analogy but here it is - purchasing your own real estate is like picking individual stocks, where you are in control. A few good picks (Amazon, Netflix?)  can make you rich. Investing in syndication is like investing in a actively-managed fund - you are trusting the manager to pick good assets in lieu of a fee but you probably will not have out-sized returns in a fund. 

@Scott Price  , I invest in both directly in real estate as well as in passive real estate via syndication/crowdfunding. In my opinion, neither is 100% superior to the other hand there are pros and cons to both. That's why I believe that if a person has the financial means, the best option for them is to do both.

1) With the direct real estate, the main advantage is that you fully control it. For example, you can set up leverage exactly the way you want to, versus being forced to go with the cookie-cutter approach. With syndication/crowdfunding, you have to rely on a 3rd party 100% to run everything, and many people are not comfortable to do that. Or they don't feel that they can vet the deals properly. If that's your situation, then I would recommend sticking to direct real estate.

2) With a syndication/crowdfunding, you can invest in a much more diversified portfolio of investments than you could by purchasing directly (diversifying biogeography, asset strategy, asset type). Usually with direct real estate a person can only afford a few properties, so they have a lot of individual investment risk.

Also, with syndication/crowdfunding, can generally afford to invest in much more expensive/higher-quality properties because the investment is pooled with many other people… Rather than having to afford the property all by yourself. If things go bust, only your money in the investment is at risk, and you aren't going to ruin your credit. Many times withprivate real estate, your credit is completely at risk. And of syndication/crowdfunding it is passive, so you don't have to run the day-to-day operations. If a person doesn't have the time, inclination or expertise to at least oversee the management, then I would recommend sticking just to syndication/crowdfunding.

I appreciate all the answers in this thread.  As someone who is looking to buy rentals in the KC area Kansas side, I've been having a hard time justifying the numbers on almost everything.  When the return is 7 to 8% at best, what's the advantage over just doing the passive stuff above?  Loan paydown, some appreciation, but higher risk?  It seems like the rentals will still beat out the passive stuff due to taxes but it would definitely be on a case by case basis.

Clearly a few years ago the numbers were in favor of buying rentals.  It feels like that line is pretty blurred right now in a lot of areas unless you're getting off market deals.  Heck even the stock market has been returning 15% since 2009 (s&p 500 index with dividend reinvest) with way better liquidity.  It makes it difficult to sell stuff that's been earning that for the past 5 years to buy something that isn't currently returning that.  I don't want to be in that analysis paralysis state but also it would be nice if the numbers were a little better to make the decision easier.

Thank you everyone for the responses! It does help me sort out things as I weigh out my options.

I do both.  If you are adding value in your active portfolio, your returns can be higher than passive investing.  If you are not able to add value in your active portfolio (or get predictable appreciation), 15-20% passive returns will be competitive or beat active investing, with much less work.

What is also interesting is if you look at your post-rehab returns on your active portfolio (i.e. holding after the value add), they can be on par with a passive investment...but more work than a passive investment.

@Aaron Taylor Deal flow is king in this market and you either dedicate the time and money into marketing to put hundreds of potential opportunities into the funnel or you invest with someone who has it.  I have been doing more of the latter in the last two years and the current market makes passive investing more attractive for those (like me) who do not have the time to cultivate mature deal flow pipelines.

Originally posted by @Scott Price :

Thank you everyone for the responses! It does help me sort out things as I weigh out my options.

 I think recourse and liability are also important. If something goes wrong and you lose your principal, blame the fund. Buying physical assets is unlikely to lose principal unless you're over leveraged...

To me, the control is more valuable with direct investments, passive investments are for later in my career.

Originally posted by @Ronald Rohde :
Originally posted by @Scott Price:

Thank you everyone for the responses! It does help me sort out things as I weigh out my options.

 I think recourse and liability are also important. If something goes wrong and you lose your principal, blame the fund. Buying physical assets is unlikely to lose principal unless you're over leveraged...

To me, the control is more valuable with direct investments, passive investments are for later in my career.

I agree that I'd rather have control. But if the gain is the same either way (I have control and have to do a bunch of work vs I have no control and do no work) I'd take the no work for sure and leverage my time to do other things like build websites that generate cash flow. Not quite the same as real estate but works on a lot of the same principals ironically, and the ROI there would blow your mind (3% a month, so like buying a website for $10k would generate you $300 a month income). Those take work though to manage and keep going, it's like being a property manager only for websites instead. Which is why I like this thread, I'm looking for ideas where I can save the most time and still generate cash flow.

Well said @Ronald Rohde .  It seems to me that "passive investing" and "syndication have become new synonyms for the old "OPM" projects.  Best to think of this type of investing as investing in a company or person rather than  in real estate.  And vet appropriately.

@Scott Price if I could start again and had the money to do it, I would do both. I would invest in Multi-family on my own and invest in a syndication as well. This allows you to learn from the larger company on a larger deal and also learn on your own deals. Be sure that you visit the large apartment, ask the sponsor and property manager questions and learn something. Also, become a key principal in a deal or 2 if that is of interest. 

As for returns. Doing it on your own will hold the largest potential returns, but will have the most risk, since you will be learning (unless you invest with a company that is learning)

Scott,

I think ultimately whether you feel you are more active, passive or a hybrid investor, most serious long term investors will often do both and over time, more assets likely will go to passive investing. Active gives you control of the asset (maybe that is small SFRs close to your location) , gives you some real world experiences to know what that feels like, especially if you are your own property manager to start. However, most investors I talk to go thru the SFR property experience and then after really understanding its limitations like a second job especially at turnover time (lack of scale, time, hassle) and then see they can get even better returns w/experts and save their weekends for more enjoyable family activities will do the shift. I still keep some SFRs in my portfolio for the control aspect but not adding to that position.

Passive syndication would give you access to experts, niches and geographies you know you should be or want to be in but don't have the time, expertise or even interest to be active.  This can diversify you, lower your overall portfolio risk and enhance overall returns if done correctly.  

Here's 10 tips for vetting a deal sponsor you may find helpful if you go this route.

https://www.biggerpockets.com/blogs/9145/53959-vet...

I also like these 3 syndication niches.

https://www.biggerpockets.com/blogs/9145/74876-gro...

@Scott Price Thanks for creating a great discussion. There is a wealth of knowledge here and experienced investors represented. 

Your question was "which is better?" well I have found that it depends on what your GOALS  are and how much TIME you have.

My wife and I are currently living in a duplex we purchased and it has been such a fun project for us. We have loved doing the rehab and project over time will be a huge equity builder for our family. BUT we have the time to do this bc we are young and don't have kids yet. We also have time to grow our wealth by holding onto the asset. Our goal is also to build a portfolio of properties in our city to be able to provide housing for folks that we come into contact with through our non-profits.

On the other hand, I also participate in syndication deals with my network of investors bc I find it to be a great strategy for investors looking for solid passive income and a relatively easy way to multiply their money. It's not a jackpot type investment strategy but it does provide avenues to allow you to continue living the type of lifestyle you wish to live. 

Feel free to reach out if you want to talk more. 

Cheers!

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