Active investment vs. Passive Investment: Side by Side Comparison

Active investment vs. Passive Investment: Side by Side Comparison

Rick MartinPro Member
Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes

I, like many, started out in single-family and small multifamily rentals. I enjoyed it, put a lot of sweat equity into it, and did pretty well over the years. I got wind of larger multifamily and thought it seemed more scalable, so I looked into buying smaller apartments and then got involved in syndication. It took a while to break into syndication, and as I grew impatient, I decided why not invest passively into syndications and earn while I learn. The projected return looked good for it being a passive investment and compared favorably when I considered that I didn’t have to do anything. The loss of control was strange, I will admit. When you look at the final numbers side by side, you can see they are very similar. What the numbers don’t tell you is, in our rentals, we had our a/c units stolen twice, and a tenant whom we had to evict threatened my partner’s life. I partnered on these two rentals in Palm Desert, California, so cash flow was okay, but appreciation was good.

All deals are different. Of course, you can do better or worse than the deals below, but I thought it was a fair comparison. They were all-cash deals. Next, I would like to take a 4 unit that I BRRR'd and compare it to an apartment syndication, where there is a return of capital in year three. Both scenarios return your capital, so you have much less money in the deal.

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Palm Desert Rentals 4-yr hold

Total Proceeds (cash flow and sales proceeds): $166,804 

Total Costs: $88,725

Profit $78,079

• 88% total return

    • 1.88 Equity multiple

    • 22% Average Annual Return

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    DFW Syndication 5-yr hold

    Total Proceeds (profit plus return of equity): $209,560

    Total Costs (minimum investment) $100,000

    Profit $109,560

    • 110% Total Return

      • 2.1% Equity Multiple

      • 21.9% Average Annual Return

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      Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
      5y

      @Rick Martin Very interesting post. Like you, I also started with rentals and then gravitated towards more passive investing (private lending). I still have my rentals though and foresee doing both (at least for a while) because they each have their pros and cons. 

      The rentals are definitely more active and honestly can sometimes be a headache, but I get so many benefits (e.g. cash flow, appreciation, tax benefits, etc). 

      With the private lending, you basically just have the monthly cash flow (interest payments) for a benefit, but I like how extremely passive it is. 

      I’m curious...your average annual returns are nearly identical between the two different scenarios, but the rental scenario obviously requires much more work/time/headache to obtain those returns. So do you see yourself possibly gravitating more towards passive investing (like syndication) in the future? Or continuing to do a mix of both?

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      • Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes
        5y

        Nice share.

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        Thanks @Aigo Pyles.

      • Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
        5y

        @Rick Martin Very interesting post. Like you, I also started with rentals and then gravitated towards more passive investing (private lending). I still have my rentals though and foresee doing both (at least for a while) because they each have their pros and cons. 

        The rentals are definitely more active and honestly can sometimes be a headache, but I get so many benefits (e.g. cash flow, appreciation, tax benefits, etc). 

        With the private lending, you basically just have the monthly cash flow (interest payments) for a benefit, but I like how extremely passive it is. 

        I’m curious...your average annual returns are nearly identical between the two different scenarios, but the rental scenario obviously requires much more work/time/headache to obtain those returns. So do you see yourself possibly gravitating more towards passive investing (like syndication) in the future? Or continuing to do a mix of both?

      • Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
        5y

        Love the story!

        Seeing the side by side results of both deals really emphasize the potential benefits of investing passively in a syndication. 

        If you don't mind me asking, how long after first deciding to invest passively did you do your own syndication deal? 

      • Member since 2020 · 3 posts · 4 votes
        5y

        This is why I've been dumping a bunch of $$ into real estate syndications recently. I was exploring for some alternatives to the stock market that will have better returns, and real estate syndications seem the best. There is risk, of course. And unfortunately that risk is very hard to calculate and compare to publicly traded securities.

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        @Kyle J.I am actively involved in syndications now, but I still passively invest in other's syndication, so it is sort of hybrid. I sold off all my single family with the exception of the one 4-plex, which by the way, I just found out has a huge make-ready cost from the last tenant. That will kill some returns. The lightbulb definitely goes off when I compare them them side by side. The more passive you can become, the more investments you can take on, because you don't have to babysit them. Those two rental in Palm desert were a lot of work, and driving back and forth.

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        @Jeffrey Donis. It took longer than I thought. Maybe about a year and a half. I learned the ropes while I also passively invested. This gives you a "behind the curtain look" how other operators run their deals and communicate, etc. I know of many people who dive into a mentorship program, and it can accelerate the process. Like anything though, it is how much you put into it, and how committed you really are to get the results you want. If you are committed, you can get there choosing either path, as long as you continually educated yourself, network constantly, and be willing to take action. I say take some time, and discover which hat you would like to wear within the syndication team. Underwriting, acquisitions, asset management, raising capital, investor relations? Get to understand where you can add value to a team.

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        @Jon Lampert I would agree with this, however it is a business model that we can all wrap our heads around. It we can improve the value, we can increase revenues. If we can increase operational efficiencies, we can reduce our expenses. If we widen that delta between revenues and expenses, we can increase our NOI. Now we divide our NOI by the prevailing market cap rate, and boom, we've increased the value. When you buy a stock, do we really have any clue what is going on under the hood? Not really. Plus all the emotion that is involved within the stock market. When we receive an investment summary for an apartment syndication, it is us to verify the assumptions supplying the pro forma, but it can be done relatively easily compared to analyzing a massive company. I hope those syndications are meeting or beating their projections for you.

      • Member since 2020 · 3 posts · 4 votes
        5y

        @Rick Martin, I'm just getting started with the syndications, with my investments all happening this year. So it'll be a few years before I know if they meet or beat projections. If all goes well, I'll roll all the returns back into more syndications and probably pull more out of the stock market.

      • Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
        5y

        Looks like the syndication came out on top apart from the slightly Avg. Annual Return but then you were a passive investor in the syndication. 

        Sometimes, control might be overrated!

      • Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
        5y
        Originally posted by @Rick Martin:

        @Jeffrey Donis. It took longer than I thought. Maybe about a year and a half. I learned the ropes while I also passively invested. This gives you a "behind the curtain look" how other operators run their deals and communicate, etc. I know of many people who dive into a mentorship program, and it can accelerate the process. Like anything though, it is how much you put into it, and how committed you really are to get the results you want. If you are committed, you can get there choosing either path, as long as you continually educated yourself, network constantly, and be willing to take action. I say take some time, and discover which hat you would like to wear within the syndication team. Underwriting, acquisitions, asset management, raising capital, investor relations? Get to understand where you can add value to a team.

        Great advice! Thank you for the response!

      • Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
        5y

        I started with 11 turnkeys from 2009-2015. Now doing syndications today. Its not a question on one is better than the other (although syndications a better) its more where your net worth is. If you are sub 500k you need to stick with doing it on you own.

      • Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
        5y

        Great post! Not a lot of people really think about their investments and how they perform against other options. There is no one size fits all, but this helps opens eyes. So many people think they need to buy a SF or dupelx on their own and end up spending a ton of money on it, cash flow very little and spend a bunch time time and effort for little results, when they had an alternative strategy staring them in the face. 

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        I thought the same thing @Todd Dexheimer. Doing all that work for maybe $200 a month in cashflow. And then yes, all the time invested. There are other, more efficient ways to get to our goal.

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        @Lane Kawaoka you'd probably agree that one key benefit that often gets overlooked is, with syndications using either a value add, or reposition strategy, the investor gets in on the deal, pre value add (or ARV) right? With a turnkey, you are basically paying retail. You know this from your turnkey experience. You also make a good point. You should have a good amount of capital available to invest passively in syndications. It's debatable as to how much, but it needs to be sufficient, because it is not a liquid investment.

      • Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
        5y
        Originally posted by @Lane Kawaoka:

        I started with 11 turnkeys from 2009-2015. Now doing syndications today. Its not a question on one is better than the other (although syndications a better) its more where your net worth is. If you are sub 500k you need to stick with doing it on you own.

        Lane, active vs passive is definitely an interesting discussion, but we all know that what you and @Rick Martin are doing is hands-down the most lucrative. But it's also well deserved because it's one of the most challenging, stressful, time-consuming and intellectually stimulating areas of real estate. I consider it the top-gun of real-estate investing....something that I admittedly don't have the time, energy and most importantly, the talent to do.

      • Josh C.Pro Member
        Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
        5y

        Great post! Thanks!

        I will say though people (yourself or syndicate) that bought almost anything 5 years ago and sold in 2020 did very well. I like the control of owning it, plus borrowing against equity, it so nice, but I can also relate to all the copper thieves ruining your week so they can buy two hits of meth.

      • Rick MartinPro Member
        OP
        Rental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
        5y

        Thanks, @Josh C.Yes, that definitely happens. There are definitely still returns for investors to be had in syndication - I think there always will be. That 4-unit I mentioned is in your hometown btw.

      • Ian IppolitoBusiness Member
        Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
        5y

        @Rick Martin, nice analysis and I think it's great you are examining all your options

        I'm an investor and support myself and my family from my investment income. And I invest in both direct real estate (via residential rentals) and syndication/crowdfunding passive investments. In my opinion, both have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both.

        Directly owned properties are great because they give you maximum control and the ability to tweak them exactly how you want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.

        Also direct control means you know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.

        The flipside of having the power to control everything is that can be alot of work (like you mentioned). And it's a full-time job if you are putting in sweat equity. Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes.

        On the other hand, one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself. And once you finish the due diligence, your work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

        The downside is that someone has to be comfortable with turning over control to someone else (as you mentioned). That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.

        Turnkey operators are kind of in-between. However I would not consider them to be truly passive because they do not put any skin into the game like a good passive investment does (via a sizable coinvestment). This coinvestment is what mitigates the risk of the other party taking risks that could be a detriment to the investor. Turnkey operators don't work like that and they are more like a broker collecting a fee for their work (regardless of the long-term performance). So they are financially misaligned on long-term performance (and I think this is why there are so many people who have had bad turnkey experiences)

        And, as someone who has done lots of rehabs directly myself, I have seen hundreds of ways that turnkey operator could take shortcuts (to the detriment of the investor but beneficial to their bottom line) which investor could never detect (or not until years later when it's too late). So personally I don't trust reviews from investors saying there turnkey operator is great (because really they have no way of knowing). And personally I cannot pull the trigger on a turnkey operator. However there are other investors who feel very differently and love turnkey operators.

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      • Realtor · Fremont, CA · Member since 2020 · 60 posts · 14 votes
        5y

        @Ian Ippolito which crowdfunding and syndication do you use and recommend

      • Realtor · Fremont, CA · Member since 2020 · 60 posts · 14 votes
        5y

        @Rick Martin how do you evaluate which syndication and crowdfunding to invest in. Which one will you recommend

      • Steve RozenbergPro Member
        Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
        5y

        I think it really depends on what your specific goal is and what your strategy is. We all have different goals and things we want out of life. Some value family, some travel, some money etc etc... WE all know its tough to put a pin point on what is good for one and bad for another.

        Definitely congrats on what you have done so far

      • Member since 2020 · 3 posts · 4 votes
        5y

        @Jay Sheth, if you have not done so already, check out Crowdstreet and Realcrowd for real estate syndications. They are both marketplaces where individual sponsors can list their syndications. Of course there are many sponsors you can connect with directly for deals as well.

      • Realtor · Fremont, CA · Member since 2020 · 60 posts · 14 votes
        5y

        @Jon Lampert thanks already using crowd street.

      • Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
        5y
        Originally posted by @Rick Martin:

        I thought the same thing @Todd Dexheimer. Doing all that work for maybe $200 a month in cashflow. And then yes, all the time invested. There are other, more efficient ways to get to our goal.

         I feel like so many people want to control the real estate, so they go out and buy what they can afford, which ends up being a duplex or maybe up to a 10 unit. Then they trudge along and make a few hundred bucks each month, with some big cap ex items jumping in here and there. I did that! I made some money, but when I finally scaled to large MF, I saw the power of scale and what it could actually do. 

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