When it comes to investing in real estate there is no shortage of options. That’s one of the strengths of real estate investing; there are many ways to get in and some of them have pretty low barriers to entry.
One question we encounter a lot is whether it makes sense to purchase a property yourself, as opposed to investing in a real estate syndication.
Real estate is extremely broad, so for the purposes of this article we are going to focus on multifamily real estate. That could mean a fourplex or an apartment building, but we’ll exclude single family homes as investment options. You’ll see there are a multitude of ways you could invest in multifamily real estate, so should you opt for a syndication, buy property yourself, or something else?
We’ll answer these questions and more in this article, let’s dive in.
Why invest in multifamily real estate
Whether real estate is a good investment could be its own article, if you’re on the fence about taking the plunge into multifamily real estate investing here are a few quick reasons why it might be a good idea:
- Real estate provides a potential for passive income and steady cash flow after mortgage payments are made.
- There are numerous tax breaks and deductions that come with investing in real estate.
- In addition to passive income, there is the potential to profit when the property is sold.
- Real estate allows you to diversify your portfolio which can help you spread risk and avoid swings in different sectors of the market.
If you have the funds, multifamily real estate is an excellent way to diversify your portfolio and build passive income.
Your options for investing in real estate
As we hinted earlier, there are a lot of options available for investing in multifamily real estate. To keep things simple, we’re going to examine the most common ways investors get into real estate.
Purchase and manage property
The most obvious way to invest in real estate is to purchase and manage a property. It doesn’t necessarily require any experience (though that certainly helps), just enough funds to get a mortgage and to cover the expenses of the property. By renting a property out, you can cover expenses and build recurring income, as well as profit off of the sale of the property.
While seemingly straightforward, purchasing and managing property carries a significant amount of overhead along with the added costs (both time and financial) in dealing with tenants.
REIT is an acronym for ‘real estate investment trust’ and functions similar to a mutual fund or ETF, some are even publicly traded. To invest in a REIT, you purchase shares which will provide a broad set of property to invest in with limited exposure. REITs provide much less exposure to an individual property making them a much more diversified option than purchasing a property, while still offering a steady stream of income. REITs provide little benefit from capital appreciation though if the property is sold.
Real estate syndication
A real estate syndication provides many of the benefits that owning and managing a property provides, while reducing some of the risks. Real estate syndications are groups of investors who come together to purchase a property, along with a general partner leading the group. This allows investors to get closer to the property than a REIT, but removed from the day to day management and hassle that comes with worrying about tenants.
Now it’s time to get to the core question we set out to answer, should you purchase a property or invest in a real estate syndication?
Pros and cons of buying real estate
There are upsides and downsides to purchasing and managing a multifamily property, let’s examine them in detail.
Pros of buying a property
Low barrier to entry
One of the strongest advantages to purchasing property yourself is that there is a lower barrier to entry. All you need is enough to cover the down payment and the mortgage. Now, this will mean hundreds of thousands of dollars up front, but as long as you have enough for that initial investment there is nothing stopping you.
There’s no denying that if you own the property, you are in complete control. For those looking to be active in managing their investment, the control of owning a property may appear attractive.
Cons of buying a property
While we mention that the initial investment is the main financial hurdle you need to jump over, there are other costs as well. Depending on the state of the property you may need to invest more up front in repairs, as well as repairs and maintenance for the property over time. If your tenants have a pet, break something, or things just wear down you will be responsible for the cost.
Dealing with tenants
With control comes the fact that you will be much closer to the property and need to manage tenants as a result. If something breaks, tenants have issues with each other, or any problem in between, you will be responsible for settling the issue. If you’re not a people person you can hire a property management company to do this for you, which adds to the overhead costs.
What if the entire property is not rented?
Owning and renting a property can provide passive income and a profit, if the entire property is rented out. Should a unit go unrented this will eat into your profit providing the burden of ensuring every unit is rented and rent is paid on time. Again, you could hire a property management company to help with this, but that adds to your ongoing costs which eats into your profit.
Pros and cons of investing in a real estate syndication
Pros of investing in a real estate syndication
Much like owning a property, you benefit from the passive income that comes with rent payments made each month. This allows you to use your investment as a stream of steady cash flow to diversify your investments. Unlike an REIT, you can also benefit from the property appreciation and sale.
Limited exposure to the property
While owning and managing a property exposes you to all sorts of hassles, investing in a real estate syndication gives you many of the perks (cash flow, appreciation) while removing the overhead and downsides of worrying about the property and its tenants.
Cons of investing in a real estate syndication
Higher barrier to entry
One of the biggest cons to investing in a real estate syndication is the higher barrier to entry. While the only thing stopping you from purchasing a property is the upfront investment for the down payment, to invest in a syndication you need to be an accredited investor. Accredited investors have an annual income of at least $200,000 (or $300,000 with a spouse) or a net worth of over $1,000,000 (excluding primary residence).
Alternatively, investors can be considered accredited through additional SEC approved criteria making them eligible to be passive investors in the syndication.
At Colony Hills Capital our requirement is that you be an accredited or sophisticated investor if you wish to invest in one of our properties or funds.
Which makes more money, owning a multifamily property or investing in a real estate syndication?
You can see there are pros and cons to buying a property vs investing in a real estate syndication, the bottom line for most investors is which makes more money. Let’s look at a quick illustration to examine this question in more detail.
Suppose you purchase a 3-unit property just outside of Boston. To make the math easy let’s say you manage to purchase it for $1,000,000, put $200,000 down, you have a 15-year mortgage so your monthly payment (mortgage, interest, taxes, insurance) is around $7,000.
Now, suppose you were to invest the $200,000 for your down payment in a real estate syndication with an 8% preferred return, that means you should expect an 8% return every year which means you could expect $1,333 each month. You need to profit over $1,333 to beat the real estate syndication, remember that.
Back to your mythical property. Let’s also say you are managing the property yourself, no property managers or middle men to cut into your profit. You need to rent out all 3 units yourself, manage the tenants, and make sure they pay their rent on time each month.
You could probably rent out each unit for $3,000 per month, bringing in $9,000 each month in revenue and $2,000 in profit on top of your mortgage, tax, and insurance payments. So far you are ahead by $$667.
But what if a tenant doesn’t pay rent on time, or stops paying altogether? What if something breaks and you need to pay for repairs? What if you cannot rent a unit? You can see that it is very easy to fall into the red when managing a property, not to mention the headaches that come with dealing with tenants.
Meanwhile, a real estate syndication provides the same benefits of owning a property in passive income and appreciation while removing the overhead and stress.
Does a real estate syndication sound like the right investment for you?
Real estate syndications are becoming more popular and attractive as a way to invest in multifamily real estate. As a result, there are plenty of platforms out there that you could pick from to start your investing journey.
If you recall, real estate syndications allow you to decide which property you invest in. As a result, it’s critical that you invest with a highly experienced group with a strong track record for success and who invests alongside you.
At Colony Hills Capital we are experts in the acquisition, ownership, and management of property in growing markets around the country, aiming to provide consistent and above average passive income to our investors. While we cannot guarantee results, we always aim to provide consistent and above average passive income to our investors. Past performance is no guarantee of future results. Interested in investing? Contact us today to learn more.