Real Estate Broker · Raleigh, NC · Member since 2021 · 80 posts · 62 votes
I'm newer to multifamily... coming from the SFR space. In the residential space, using private money lenders in the second position is a very common way to fund your entry fee for seller finance or sub-to deal. At first glance, being an LP in syndication seems to be a better passive route than being a PML. The returns seem to be better, there seems to be less risk in apartments than SFRs, and you get to own a part of the asset vs just occupying a lien position on the property.
@Ethan Neumann, I think the big thing you are missing is being in a lien position puts you higher in the capital stack over equity/non-lien position. So be nature a private lender is going to be a lower risk position than any LP position, all else being equal.
How you assess those risks, and the fact that "all else" isn't actually equal does change this calculus, but from a technical stand point lenders (1st or 2nd lien position) hold less risk than equity investors.
Now, I will agree that being a private lender is like buying single family rentals. You have to actively be looking for new deals, and managing all those payments, that are hopefully coming in. Mortgage payment = rent payment. Eviction = foreclosure. At the end of the day, I prefer LP investing in syndications, because I like the higher returns. But if a deal goes south, equity is wiped out, and the lenders get the property.
I think another big bit is that as a LP investor you can partner with investors that have thousands of units of experience under their belts. Private money lending is considerably more difficult to break into if you don't know what to look for, and is tougher to leverage the experience of others.
Some folks prefer being a lender because they don't want to give up control. That's fine too. It's a matter of preference to be sure.
You can be in the lending side in a passive way also. Lots of hard money funds paying out 10-12% passive income. Downsides of lending side is that its taxed as income not capital gains (not an issue in an IRA). Advantage is it pays relatively stable income. Syndications are better for tax purposes (depreciation, capital gains rates etc) but have less predictable cash flows and less liquidity in general.
@Mike Dymski That's another great way to think about it. With private money lending, you could have five different deals and five different investors, lowering your effective rate of return and increasing your time spent on it.
@Taylor L. What do you exactly mean by "Some folks prefer being a lender because they don't want to give up control"?
As an LP in a syndication, you hand over decision making rights to the sponsor. As a lender you have some options. I know lenders personally who keep pretty tight control over the properties they lend on, because generally they're writing substantial checks and bankrolling a lot of the operation.
@Ethan Neumann, I think the big thing you are missing is being in a lien position puts you higher in the capital stack over equity/non-lien position. So be nature a private lender is going to be a lower risk position than any LP position, all else being equal.
How you assess those risks, and the fact that "all else" isn't actually equal does change this calculus, but from a technical stand point lenders (1st or 2nd lien position) hold less risk than equity investors.
Now, I will agree that being a private lender is like buying single family rentals. You have to actively be looking for new deals, and managing all those payments, that are hopefully coming in. Mortgage payment = rent payment. Eviction = foreclosure. At the end of the day, I prefer LP investing in syndications, because I like the higher returns. But if a deal goes south, equity is wiped out, and the lenders get the property.
Hey @Ethan Neumann. I agree with @Michael Le. The tax benefits of multifamily real estate, such as depreciation and deduction leftovers make apartment investing very advantageous for those looking to offset their taxable income.
To add only slightly to @Mike Dymski point, being an LP in a syndication means you are a buying a financial produced created by someone else, namely the GPs. In order to get that product you have to pay for it, just like you pay for any other product you buy. These products have common characteristics, they raise capital, find deal/s, execute some sort of wealth generating plan, and return capital. This usually takes 5-7 yrs. They are a Real Estate Platform.
PML in their simplest form don't by products, but rather create and manage assets, in this case the loans. This has much more in common with SFR than with syndications. When this grows to scale it becomes a RE business and behaves just almost any other business, providing value to clients (those to whom the loans are given) and as a result of that value creating, they make a profit.
One isn't better or worse than the other, they are simply different.
@Ethan Neumann there is a BP Book by @Brian Burke about investing in syndications called “The Hands-Off Investor.” I’d highly recommend that before going this route. Good luck!