Investor Options: Hard money, multi-family, syndicate...

16 Replies

I’ve reached a point in my career where my earned income is flowing a bit easier and more than my family really needs to live comfortably. First world problem fortunately.

I’ve hit a crossroads and need to decide what route to take as an investor. Looking for some advice.

- Continue accumulating SFR rentals. I have a great, but relatively small, PM team in a city I know well (2,000+ miles away from where I live!) They already manage a couple of properties which are leased out and I'm very happy with this. They would be willing to take on another property if I go this route. My rentals are Class A, but I'd likely start looking into Class B.

- Use additional income to pay down these properties much, and cash flow much faster/heavier.

- Hardmoney lend to a flipper. This is with someone I know and have worked with in a professional manner. Problem is the amount of capital required is fairly significant, with little garauntee of return if something went wrong.

- Multifamily 4 to 10+ unit apt complexes. As an investor, I've always wanted to enter this space, kind of a "life goal" in a way. Headaches expected, and welcome that come with the learning curve. I have vetted a PM team in the same city as my other SFR rentals, who can handle the added work associated with multi-family complexes. They can also help me identify the correct properties to go after. Problem is it is a lot tougher to sell a multi-family then it is a SFR if/when things get bad. And this is also heavily reliant on the PM team as not every PM company can adequately staff a multi-family.

- Online passive syndicate crowd funding. Zero control over it, and seems like it's not doing much to really secure my family's future. The returns seem questionable. I'm still willing to consider it as an otherwise passive investor if I get feedback from reputable BP members saying they've had success here.

My current rentals pay for themselves but have appreciated well. I bought them for the long haul, to protect my future self from current myself. I’m already thankful to my former self for this! I would likely not have gotten these returns in any other form of investment.

Goal is to continue using OPM to secure retirement plus pension, whatever paltry SS we get, and our 401ks. All advice appreciated!

Hi Aaron,

In my opinion, multifamily is the way to go. The main issue with SFRs compared to multifamily is scalability. You can only buy one door at a time and will eventually lose the option to secure residential loans. 

Since their is only 1 tenant for SFRs, vacancies and evictions (and even one decent sized maintenance issue) have a much greater impact on the cash flow. With multifamily, that risk is spread across multiple units.

If you eventually want to use OPM to purchase multifamily, having a proven track record investing in MF on your own is a huge plus.

I think most investors eventually move toward MFH as the scalability is much easier.  I'm in the same camp and find myself pivoting much more more towards the MF space.  Looking to add some 2-10 units properties as well as syndication in the next 12 months.  

There's really no right or wrong answer, @Aaron Hunt . SFRs have an advantage in that they are fairly liquid (in markets that are at least decent). Small multifamily has an advantage that they can provide some efficiencies. But in my experience, having owned both for decades, is that tenants of small multifamily properties are oftentimes more transient (meaning higher turnover than in SFR) which tends to negate some of the efficiencies that you gain. So for me, SFR vs. small multi is somewhat of a coin toss, so I own both. Nothing says you can or should do only one or the other.

As to scalability, it is true that SFR is less scalable than multifamily, but this is only a problem if you are seeking to achieve scale. If you are just looking to add a couple of properties to your portfolio and stop there, scalability won't matter to you. At least not yet.

If I were you I don't think I'd use my money to pay down loans, not much to gain there, really.  You'd be better off using those funds to acquire additional properties, in my opinion.  What I did instead was refinance all of my personal rentals onto 15 year fully amortizing loans so that I would own my whole portfolio free and clear by the time I turn 60.  I don't need the cash flow now, and whether I'll need it then isn't the point...the goal is to have this safety net that I know that no matter what happens to me that income will be there.

The "lend hard money" route might not be the best route for you if it takes up a significant portion of your liquidity.  It could be a good ancillary strategy and a place to park cash for relatively short periods if you are dealing with experienced, proven borrowers.  But this is a fixed-return type of strategy and if you are looking for upside you are unlikely to find it here.  Perhaps as an alternative you partner with your flipper friend where you contribute the cash and get a split of the profits in return.  Just be aware of the downside.

As to passive investing in a syndication, this is a very common outlet for people that have limited time, experience, resources, and/or relationships to invest in multifamily on their own, or simply do not want to invest in it on their own, opting instead for the investment sponsors to do all of the work.  One thing you said is certainly true:  you have no control.  Well, you have control over which offerings you invest in, what sponsors you invest with etc...but once the investment is made you have no control over the operations and decisions.  As long as you are investing with the right sponsor this isn't a bad thing.

But I'd advise against "online passive syndicate crowd funding".  This isn't a point-and-click strategy like ordering your groceries from Amazon...it does require due diligence and research on who you are investing with.  I'd suggest that if you are going to pursue this strategy that you focus your efforts on figuring out who you might want to invest with, conduct thorough due diligence on them, talk to references, and visit their offices...and invest with those groups directly rather than through a crowdfunding website.  

Whatever you decide, investing in syndications and investing directly in real estate aren't mutually exclusive. I know many people that invest in private offerings but also invest directly in real estate.

Originally posted by @Brian Burke :

There's really no right or wrong answer, @Aaron Hunt. SFRs have an advantage in that they are fairly liquid (in markets that are at least decent). Small multifamily has an advantage that they can provide some efficiencies. But in my experience, having owned both for decades, is that tenants of small multifamily properties are oftentimes more transient (meaning higher turnover than in SFR) which tends to negate some of the efficiencies that you gain. So for me, SFR vs. small multi is somewhat of a coin toss, so I own both. Nothing says you can or should do only one or the other.

As to scalability, it is true that SFR is less scalable than multifamily, but this is only a problem if you are seeking to achieve scale. If you are just looking to add a couple of properties to your portfolio and stop there, scalability won't matter to you. At least not yet.

If I were you I don't think I'd use my money to pay down loans, not much to gain there, really.  You'd be better off using those funds to acquire additional properties, in my opinion.  What I did instead was refinance all of my personal rentals onto 15 year fully amortizing loans so that I would own my whole portfolio free and clear by the time I turn 60.  I don't need the cash flow now, and whether I'll need it then isn't the point...the goal is to have this safety net that I know that no matter what happens to me that income will be there.

The "lend hard money" route might not be the best route for you if it takes up a significant portion of your liquidity.  It could be a good ancillary strategy and a place to park cash for relatively short periods if you are dealing with experienced, proven borrowers.  But this is a fixed-return type of strategy and if you are looking for upside you are unlikely to find it here.  Perhaps as an alternative you partner with your flipper friend where you contribute the cash and get a split of the profits in return.  Just be aware of the downside.

As to passive investing in a syndication, this is a very common outlet for people that have limited time, experience, resources, and/or relationships to invest in multifamily on their own, or simply do not want to invest in it on their own, opting instead for the investment sponsors to do all of the work.  One thing you said is certainly true:  you have no control.  Well, you have control over which offerings you invest in, what sponsors you invest with etc...but once the investment is made you have no control over the operations and decisions.  As long as you are investing with the right sponsor this isn't a bad thing.

But I'd advise against "online passive syndicate crowd funding".  This isn't a point-and-click strategy like ordering your groceries from Amazon...it does require due diligence and research on who you are investing with.  I'd suggest that if you are going to pursue this strategy that you focus your efforts on figuring out who you might want to invest with, conduct thorough due diligence on them, talk to references, and visit their offices...and invest with those groups directly rather than through a crowdfunding website.  

Whatever you decide, investing in syndications and investing directly in real estate aren't mutually exclusive.  I know many people that invest in private offerings but also invest directly in real estate.

Thanks Brian. Very thorough and extremely helpful. Sometimes you need to hear it from someone else.

I have a call scheduled with the multifamily PM next week to see what options I have.

I've been aggressively stashing much of our income away in tax deferred accounts, and in equity investments in the meantime. (We do also need to buy a larger home at some point.)

My rental investments were bought at 3.75-4.25%, as owner occupied, 30 year notes and 5% down. I don’t think I can beat those rates with 15 yr refi’s at investor rates. What I can do is pay the principal down earlier. 

However, being in the “accumulation phase” (early 30s), I figured I can sit on the 30 yr notes and let others pay them off.

To tap into the appreciation equity I have opened a HELOC out as well, but really haven't used it.

I was considering putting this money into one of the online crowd-funding syndicates at a higher rate 8-9% and aiming to generate a paltry 2-3% more than the HELOC rate. Not sure how sound that strategy is, but figured I should at least try to do something with it.

If all else seems to challenging, difficult or makes me uneasy, I'll just stick with what I know best: SFR rentals.

Originally posted by @Theo Hicks :

Hi Aaron,

In my opinion, multifamily is the way to go. The main issue with SFRs compared to multifamily is scalability. You can only buy one door at a time and will eventually lose the option to secure residential loans. 

Since their is only 1 tenant for SFRs, vacancies and evictions (and even one decent sized maintenance issue) have a much greater impact on the cash flow. With multifamily, that risk is spread across multiple units.

If you eventually want to use OPM to purchase multifamily, having a proven track record investing in MF on your own is a huge plus.

Thanks Theo. I think considering it is a personal life long goal of mine to own a complex it has me even more intrigued. I’m certainly going to try to venture in this direction if I am able to.

Originally posted by @Kon Zel :

I think most investors eventually move toward MFH as the scalability is much easier.  I'm in the same camp and find myself pivoting much more more towards the MF space.  Looking to add some 2-10 units properties as well as syndication in the next 12 months.  

I'd be a lot more comfortable if I had 2-10 units properties closer to where I currently live. Unfortunately, where I live is not investor friendly from a cashflow standpoint, and it's not a landlord friendly state in comparison to where my rentals are. I think this has been a factor which has definitely caused me to slow down.

Originally posted by @Aaron Hunt :
Originally posted by @Kon Zel:

I think most investors eventually move toward MFH as the scalability is much easier.  I'm in the same camp and find myself pivoting much more more towards the MF space.  Looking to add some 2-10 units properties as well as syndication in the next 12 months.  

I’d be a lot more comfortable if I had 2-10 units properties closer to where I currently live. Unfortunately, where I live is not investor friendly from a cashflow standpoint, and it’s not a landlord friendly state in comparison to where my rentals are. I think this has been a factor which has definitely caused me to slow down.

 You say that, but I'm in the exact same camp and am still finding deals.  Currently UC for a 4 unit and a 2 unit.  

Just need to dig a little harder in areas like NJ, NY, CA, etc.  

@Aaron Hunt , I own every asset class you've described in my personal portfolio. In my opinion, anyone that tells you that any one of them is superior in all ways to the others, is not giving you the complete picture. I believe they all have their pluses and minuses and all have an important role to play in a properly balanced portfolio.

1) single-family rentals: this is the core of my real estate portfolio. There was a study done on the long-term return of single-family rentals versus traditional investments (stocks, bonds, etc.) all the way back to the 1870s. In both the premodern and modern eras, this has outperformed the others on a risk-adjusted basis. They only studied non-leveraged single-family rentals, and in my opinion some people go overboard with the leverage. And these are never going to be home runs like can be achieved in other areas. But if you go with core/satellite portfolio construction (i.e. most of your investment should be in things that are conservative, with a smaller satellite portion in riskier things) then I think this is a great core holding.

2) hard money loans: when underwritten conservatively (65% LTV or lower, no judicial-only states, first lien, etc), they can be a very good defensive investment in the downturn. (Investing in debt is safer than investing in equity in the same deal, because it has the protection of collateral in a bankruptcy). I personally don't do individual hard money loans, because I think hard money loan funds are better. I can instantly be diversified into hundreds of loans for a much lower minimum, and I don't have to continually do due diligence every time they come due. That to me is well worth paying a small fee to have a professional manager with experience do on my behalf. I'm currently in Broadmark, Arixa and have been happy with the results. I'm probably going into IronBridge very soon.

3) Syndications/crowdfunding: it's incorrect to say that the returns here are any more questionable than any other real estate option. Like in every area, there are small number that are excellent, and a small number that are horrible and most are just okay. The advantage here is that again you can get in at a much lower minimum, and access a class of property that on your own you probably couldn't afford. You also have access to a bunch of different options that most people can't do on their own such as self storage, mobile home parks, retail, triple net lease, etc. In the other advantage is that if you choose properly, you can get an operator that has perhaps decades more experience than most people can ever hope to gain. An important part of investing is avoiding losses, and rookie mistakes are an easy way to take unnecessary losses.

4) multifamily: I've tried to go with direct ownership in my local Tampa market here for the last two and half years and not been able to find anything that cash flows as well as I can do through syndications/crowdfunding multi family. So that's how I invest in multi family, and I've been happy with it. But more power to anyone who can find something where the numbers work better for them that way.

@Aaron Hunt If you are considering leveraging yourself with financing from a commercial lender like me, keep in mind the more experience you have with MFHs the better the rates and terms will be. My advice is to get a good relationship with a commercial lender and add them to your team. Much success.

Aaron Hunt I'd say go with MULTIFAMILY. It's pretty safe and you can scale a lot faster. I'd also advise you not to put al your eggs in one basket - why not invest some of the money with other investors in Multifamily and use some of it for hard money lending? I know investors who do that and they do very well. 

"- Continue accumulating SFR rentals. I have a great, but relatively small, PM team in a city I know well (2,000+ miles away from where I live!) They already manage a couple of properties which are leased out and I'm very happy with this."

What makes you want to change? 

Your earlier comment of sticking with what you know best is a good one. If your strategy isn't broke, and if it's working, keep it up. It can be risky venturing into areas where your learning curve is steep. Seems like you can pull back and think about lifestyle, family, etc and then build a plan around that. Don't let the strategy determine your lifestyle. Do the reverse. It's not all about building net worth. Build your life first!

Originally posted by @Mike Dymski :

"- Continue accumulating SFR rentals. I have a great, but relatively small, PM team in a city I know well (2,000+ miles away from where I live!) They already manage a couple of properties which are leased out and I'm very happy with this."

What makes you want to change? 

That’s a fair question.

I was actually pre-approved for another property out there, and the same team was happy to continue working with me. And I do plan to continue working with them for what we currently own.

This PM team is not greedy for business, and they screen investors just as strict as they do tenants. They use direct deposit for all tenant rents and over-communicate with me regularly. You can probably see why I like working with them.

It’s just that times have changed. What I mean is - our annual household income suddenly increased overnight. We were expecting it, but it surprised us once we saw the actual numbers. Our spending habits have not really changed. We’re pretty happy with what we have in the 10 & 12 yr old cars, and renting a nice apartment.

I just assumed I should take a moment to re-calibrate our investment strategy and look at other options.

@Aaron Hunt I think the feedback you received on this post is invaluable, especially from such great minds as @Brian Burke and @Ian Ippolito . I don't know whether you're a f/t investor/entrepreneur or have W-2 job. But based on your personal (family) situation you may or may not be able to claim the "active real estate professional" status on your tax return, which in turn may have significant tax consequences on your taxes due.  

So I think what it comes down to is: having multiple investment strategies in mind and discussing them with your CPA assuming your CPA is real estate savvy and can advise you on the better strategy from a tax perspective. 

Best!

Originally posted by @Alina Trigub :

@Aaron Hunt I think the feedback you received on this post is invaluable, especially from such great minds as @Brian Burke and @Ian Ippolito . I don't know whether you're a f/t investor/entrepreneur or have W-2 job. But based on your personal (family) situation you may or may not be able to claim the "active real estate professional" status on your tax return, which in turn may have significant tax consequences on your taxes due.  

So I think what it comes down to is: having multiple investment strategies in mind and discussing them with your CPA assuming your CPA is real estate savvy and can advise you on the better strategy from a tax perspective. 

Best!

Sorry, just saw this. Thanks for the post. I’m FT W2, as is my wife. I work a lot of fully documented hours in my W2. There’s no possibility for me to qualify as a real estate professional - unless I can convince the IRS I don’t sleep.

I do need to find a good CPA. That’s one thing I’ve been lacking. Had been doing my own taxes up until now but at this point it’s just no longer worth it.

Aaron, there're tons of RE CPA's here on BP. Just do a search on BP if you're open to a virtual one.

Originally posted by @Aaron Hunt :
Originally posted by @Alina Trigub:

@Aaron Hunt I think the feedback you received on this post is invaluable, especially from such great minds as @Brian Burke and @Ian Ippolito . I don't know whether you're a f/t investor/entrepreneur or have W-2 job. But based on your personal (family) situation you may or may not be able to claim the "active real estate professional" status on your tax return, which in turn may have significant tax consequences on your taxes due.  

So I think what it comes down to is: having multiple investment strategies in mind and discussing them with your CPA assuming your CPA is real estate savvy and can advise you on the better strategy from a tax perspective. 

Best!

Sorry, just saw this. Thanks for the post. I’m FT W2, as is my wife. I work a lot of fully documented hours in my W2. There’s no possibility for me to qualify as a real estate professional - unless I can convince the IRS I don’t sleep.

I do need to find a good CPA. That’s one thing I’ve been lacking. Had been doing my own taxes up until now but at this point it’s just no longer worth it.

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