2-4 MFR buy & hold vs Apartment Syndication

16 Replies

I'm at the point where I'm ready to invest in something & these 2 options are appealing to me. Which do YOU prefer & why?

@Alex Corral are you an accredited investor and what is the track record of the sponsor for the syndication? 

It is hard to make a call between the two in a vacuum. I said this in another post, but if Bernie Madoff was the sponsor of a syndication I'd be running to buy 2-4 MFs. If Sam Zell was the GP I'd sell my car and walk to work in order to maximize returns.

Bill F.

Not accredited, that's partially why I'm still looking at small MFR.

Lol @ Madhoff! I totally agree.

I keep reading about syndication being the way to go now.

@Alex Corral if you are not accredited it will be considerably more difficult to find an syndication to invest in. Not my wheel house and I know there are exceptions under the friends and family part of Rule 506, but the general guideline is unless you have a previous relationship with the syndication they can't take your money. 

Who have you been hearing a lot about syndication from? Probably syndicators responding to other peoples posts. A large part of sponsoring a deal is raising money to invest. Its the new hot thing now that everyone wants a part of. Just like in '06 where there wasn't a country club up and down the east coast that didn't have at least one member talking about how they got their cash in a hedge fund and knew a guy who could get them in with Bernie.

Beware the flavor of the week. 

I like both, depending on what your goals are. If you want to be more passive and still get good returns, then syndication is a good fit for you. You're not accredited, so you will need to form a good relationship with syndicates that take non-accredited investors. Also, do your job in vetting the sponsor and the deal. In my opinion, there is a lot of aggressive underwriting going on to make deals work. 

For 2-4 unit buildings, if you can be active and buy low, renovate, raise rents and then refi on the loan, you could do very well. This is an active approach, but if done right will allow you to use $100k to buy 10-20+ units. 

@Alex Corral

As @Bill F.. mentioned, it definitely depends on your personal goals and risk tolerance, but on a straight comparison:

2-4 Unit MF rentals are valued on a comparison basis so the equity appreciation or deprecation will be more volatile.  Given that we are at or near the top of the market, I would not suggest purchasing for continued appreciation but instead purchase for cash flow and holding for a long enough period that you won't need to sell during the next downturn.  Certain markets are much better than others in this respect. 

Syndicates offer more stabilized returns. Properties in the 100+ unit space are valued on a income basis and since income is much more stable than SFH and small MF values, the total value are much less volatile as well. Again to Bill's point, you want a team with a very narrow scope. Ideally one that has completed numerous properties in the same market, with the same team, using the same strategy.

Best,

Salem

@Alex Corral You've got great advice from @Bill F. Don't be in a hurry, take your time to decide what you want to do. 

Everyone seems to be "raising capital". Most people don't raise more than once or more than 500K. Both don't take you very far. 

It would best for you to outline your goals, objectives, constraints and budget. Then you can solve to find the optimal solution. Syndications might be great for one investor but might not be optimal for another one. Everything is relative to your needs and objectives. 

Bill F.

Yes, pretty much any thread I'm reading on for new investors, syndication comes up. I don't mind doing a lot of leg work & research, on the contrary - it's the least I can do. But I AM looking at the most efficient return for my money. I have read of many opportunities for non-accredited.

I'm searching for strictly cash-flow. Not banking on appreciation at all.

How would you guys suggest I analyze and vet the syndication opportunities?

Thanks!

@Alex Corral Aside from accredited investor status you need to ask yourself if you would rather be an active or passive investor. Sure, you can use a PM and there's always talk about "passive income" with real estate ownership but that's not entirely true. It's really, really not true if you start to scale and have a decent portfolio. Sometimes it's because things come up with the properties and sometimes it's because you actually like REI and you're looking for the "next deal". Either way, syndication is a much more passive endeavor.

But like others have said, it's never really an apples-to-apples comparison.

Originally posted by @Alex Corral :

Bill F.

Yes, pretty much any thread I'm reading on for new investors, syndication comes up. I don't mind doing a lot of leg work & research, on the contrary - it's the least I can do. But I AM looking at the most efficient return for my money. I have read of many opportunities for non-accredited.

I'm searching for strictly cash-flow. Not banking on appreciation at all.

How would you guys suggest I analyze and vet the syndication opportunities?

Thanks!

It comes up here because syndicators are networking on BP for investors.  They reply to the "I have $X to invest" posts.  They add value by sharing their expertise and advice and, in turn, it generates leads for them over time.

The JOBS Act increased the visibility of syndication opportunities but it's still not a widely know strategy.

Love the terms "most efficient return" for my money.  Our time is expensive.

@Alex Corral Good luck finding non accredited syndication opportunities. 

Veting Sponsors: Check out their business plan. How grounded to reality are their exit strategies. Do plan on buying at a 12 Cap and selling at a 6 Cap in 18 months? Does their rehab plan have them rehabing 20 units a month in metro Dallas without any contractors lined up? Get referals from investors they've worked with and ask about how timely their communication has been, do the checks and tax documents come on time? 

Questions along those lines. The problem you'll run into is that a lot of guys won't want to deal with a full vetting process for $50k of your money.

I agree with @Todd Dexheimer when he says there are some optimistic assumptions being had in a lot of underwriting that don't jibe with what is going on in the market. But that could just be what I'm seeing. Your mileage may vary.

@Andrew Johnson

Definitely active! But I don't want to be fielding calls about a toilet to make 12% ROI, when I can get 12% on a syndication. Or even 10% on notes.

I know my limits though. And would gladly pay someone to do something I don't know, or can do it better.

Starting out I would suggest you either invest by your self or invest with a partner where you are active in the property. Your first couple of deals you won't be making home runs. You will be making singles and doubles. Syndication is great but I wouldn't suggest you go that route unless you know how to identify a syndicator or you have money to burn when you learn from your mistakes.

There are a lot of companies that take non-accredited investors. Quite frankly, the biggest reason that we allow some non-accredited into every deal is because I don't believe in the non-accredited vs accredited issue from the start. To me it's just another way to hold back that have-not's from the have's. We are so busy trying to protect everyone that we stop them from making some of the best investments they could make. 

Recently my partner's and I just started a crowdfunding portal to help better serve everyone so that all can enjoy the benefits of passive RE. 

@Alex Corral got to love Mom and pop investors who try and do the duplex quad plex small apartment route.

They put all their money into one deal...

They frankly are not very good at what they do...

They don’t take advice from anyone...

You know what I like best... we buy their property after they screw up and they fail at their recourse note.

Originally posted by @Alex Corral :

Andrew Johnson

Definitely active! But I don't want to be fielding calls about a toilet to make 12% ROI, when I can get 12% on a syndication. Or even 10% on notes.

I know my limits though. And would gladly pay someone to do something I don't know, or can do it better.

Alex, your questions and answers are insightful (and important).  There are long-time investors that don't realize their returns relative to their effort, don't realize their returns relative to alternatives, and don't ask themselves these questions.

IMO, if you are not adding value or buying below market, many stabilized buy and hold returns are not worth the effort relative to passive investing.  Active real estate investing is too much work to not achieve outpaced returns.

@Alex Corral keep getting educated until you know beyond a shadow of a doubt which routes gets you a better return over the long run. Hint: it's NOT 2-4mfr! :)

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