If you’ve ever experienced owning single-family or multifamily homes, you know that these investments require a LOT of time and energy.
Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, negotiating and funding the deal, renovating the property, interviewing tenants, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up.
In one of my first single-family rentals, I had a tenant and her cat move out. I stopped by the property and smelled a distinct odor of cat urine. “It can’t be…” I thought. We had just had the carpets deep cleaned! Turns out – cat pee can seep into the floorboard and no amount of carpet cleaning is going to remedy the smell. So, with 5 days before a new tenant was set to move it, we had to rip up the carpet in the master bedroom and try to remediate the smell of cat pee. I can tell you – this is not an easy process and it involved copious bleach, baking soda, and me scrubbing for hours (all while my 7 week old infant slept in his car seat in the next room!) All of this for ONE tenant in ONE unit!
Why Investing in Multifamily Rentals Can Be a Lot of Work
Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each. You can also better justify and cover the cost of a property manager to help with turnover and leasing.
But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still your responsibility. You’re basically running a small business, which can be challenging if you’re working a full-time job.
The Case for Passive Real Estate Investments
On the flip side, there are fully passive investments in commercial real estate, also known as syndications. These are professionally managed and operated investments so you don’t have to deal with any of the three T’s – Tenants, Toilets, and Termites.
I wish I knew about these so.much.sooner.
Once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:
1. Minimal Time Required
Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow 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. Tax Benefits! The best!
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.
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, or the loan to buy the property, and none of your other assets would be at risk.
5. Positive Impact
With personal investments, you make a difference in two to four families’ lives. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.
Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you won’t get from stocks and mutual funds.
Conclusion
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable (and likely will give you some great dinnertime fodder). However, personally owning rental properties is not a prerequisite to commercial real estate syndications.
Either way, investing in real estate syndications is a great way to diversify your portfolio, mitigate risk, and accelerate your wealth.