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Finding Your Best Fit: Rental Properties Or Real Estate Syndications

by | Mar 30, 2021

Owning single-family or multifamily rental homes (and managing them well) requires a ton of time and energy. If you ever want to hear wild stories about toilets, rats, tenant woes, or landscaping gone wrong, I’m your guy!

But it’s not just the tenant woes and repairs that make residential rental management a challenge. Investing in residential real estate requires you as the investor to wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance. 

The trouble is, you’re never “done” and the cycle restarts again every time a tenant’s lease is up or you acquire a new property. 

The Invisible Workload That Comes With Single-Family and Small Multifamily Rentals 

Generally, I’d say small multifamily rentals give investors an advantage because, for example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. In many aspects, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each. 

However, even after you hire a property manager to help with your rentals, all the back-end  bookkeeping, strategic decisions, and maintenance/repair costs are still your responsibility. You carry the weight of running a small business on your shoulders. And for most people who also either work full time or run their own business and have a bustling family life, taking on a “side-hustle” managing rental properties seems nearly impossible. 

Why Passive Real Estate Investments Might Be Your “Magic Pill” 

A little-known secret I’m ecstatic to share with you, though, is that there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to face any of the landlording horrors like shop-vaccing sewage water, ridding rats from crawlspaces, or renovations gone sideways. 

According to Forbes, once investors begin to understand passive commercial real estate investments, it’s extremely common for them to move toward syndications. Here’s why:

1. Minimal Time Commitment

Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cashflow during the hold period, and receive profits upon the sale of the property.

You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.

2. Opportunity for Diversification

It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets. 

By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.

3. Did You Say Tax Benefits?

Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!

You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation.)

4. Limited Liability

When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.

Investing in real estate syndications as a limited partner allows you to reap all the rewards of being a real estate investor while protecting your family, your home, your business, and all your other assets.

5. Positive Impact

With personal investments, you make a difference in two to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.

As I’ve already learned locally here in Seattle, I love the positive impact property improvement has on the greater community, the connections that are formed during and as a result of the rehab, and that I get to help tenants have great homes, while also helping investors reach their goals. 

Each syndication creates a cleaner, safer, and more beautiful place for people to live and impacts the surrounding community and the environment positively. Those are rewards you just can’t find in trading stocks and mutual funds.

Conclusion

If you’re on the fence between active and passive real estate investments, I’ll be the first to tell you the experience gained from owning small rentals is irreplaceable. My hands-on experience in construction and property ownership has taught me things I could have never learned elsewhere, and I’m so thankful for the lessons. However, personally owning rental properties is not a prerequisite to investing in commercial real estate syndications.

It’s likely you are already immersed in a full family life and an even more demanding career, but you can see how investing in real estate might be your golden ticket to creating and preserving generational wealth. These days, the day job’s paycheck doesn’t go far enough and a separate source of cashflow and investment appreciation is vital to reaching that beachy retirement you imagine.

Either route you choose, investing in real estate is a great way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and the greater community.