If you’ve ever experienced owning single-family or multifamily homes, you know that these investments require a ton of your 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, 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 when your tenant’s lease is up.
How Single-Family and Small multifamily Rentals Can Have You Feeling In-Over-Your-Head
I catch your drift! You think it’d be more efficient to get a little duplex or quadplex instead of a single-family property. I agree . . . a little.
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.
But, even with a property manager to help with your rentals, you are still responsible for bookkeeping, strategic decisions, and maintenance/repair costs. In addition, you’re running a small business, which can be challenging if you’re working a full-time job.
We originally planned to buy a six- or eight-plex until we learned about the power of syndications in 2014. After that, we’ve never looked back!
Why You Might Lean Toward Real Estate Syndications
Just imagine: an entirely passive, professionally-operated, large-scale investment property (think millions of dollars here) where you can partake in the ownership and reap the rewards of owning real estate (i.e., cash flow and tax breaks) without having to deal with 3 am calls, tenant woes, flooding bathrooms, or pest control issues!
According to Forbes, 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. Instead, 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 confident the professionals are taking care of business. Doing so will allow 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. In addition, you’ll be able to write off most of the quarterly payouts, which means you 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 CPA or tax professionals when considering your tax situation.)
4. Limited Liability
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. For example, if you were to invest $50,000, your most significant risk would be losing that $50,000. However, you wouldn’t be on the hook for the entire value of 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, which is terrific. 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 and safer place for people to live and positively impacts the community and the environment. And that’s something you just can’t gain from stocks and mutual funds.
Rentals Versus Syndications – Which Is Right For You?
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. We’ve done both, and we’ll tell you that owning rental properties is not a prerequisite to commercial real estate syndications. They’re completely different!
You can do both, pick one over the other, or have one first and migrate toward the other slowly.
Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. In addition, it allows you to have a positive impact on the families who will live in your units and a positive impact on the environment and community.