Should you invest in Rental Properties or Real Estate Syndications?
The Texas Triangle has been a source for explosive population growth and rising demand for housing. For investors, this creates an interesting dilemma. The need for affordable housing is clear. But if you are going to get into this market space, which direction should you go? Single Family Rentals or a Multifamily syndication? It is a question our investment team gets often. Followed by questions on which one provides the best return on investment and what factors should you consider to know which is the best choice for you.
When considering a single-family rental, you have two options. You can manage it yourself, allowing you to minimize your expenses or you can hire a property manager. If you choose to hire a management company, your involvement becomes more passive. The work involved from owning the asset is taken care of on your behalf. However, this route also depletes some of the gains you would otherwise earn. Since we are discussing maximizing your returns in this article, we are going to assume you would manage the property yourself. Given this assumption, you would personally be responsible for all the property maintenance and tenant management.
One of the major benefits of Real Estate syndication is that it is considered a fully passive investment. Investors can invest knowing that all the management, maintenance, and execution of the business plan will be taken care of for them.
Although this is a significant perk, there are other differences. Let’s explore them further.
Multifamily Real Estate Syndication Benefits
Cash Flow –
Many people invest in Real Estate to provide cash flow. Each real estate syndication opportunity has its own unique rate of return. The REEP Equity team calculates this through a lengthy due diligence process and provides a very conservative anticipated rate of return. We do our best to present a business plan that we feel we can deliver on. (The numbers provided here are a possible example and do not represent a guarantee of future performance.)
As a point of reference, we will use an investment of $75,000 with an anticipated rate of return of 10% for this example.
$75,000 x 10% = $75,000 / 12 months = $625 monthly cash flow
This cash flow does not require any effort on the part of the investor and instead comes to you completely passively.
Rapid Acceleration –
Another benefit to a Syndication is its ability to help you scale your portfolio. If you are not familiar with the Stages of a Real Estate Syndication, we invite you to read our other blog post on that topic.
As we covered in the other article, properties are commonly held for five years, with an opportunity for refinance around year three. If we take our original example and expand the timeline to five years, you can see the true long term growth benefits.
$75,000 x 10% = $75,000 / 12 months = $625 monthly cash flow
Year 1 – $625 monthly cash flow
Year 2 – $625 monthly cash flow
Year 3 – $625 monthly cash flow – Refinance event
Year 4 – Add additional investment by reinvesting capital from 1st opportunity
Year 4 – $625 + $625 = $1250 monthly cash flow
Year 5 – $625 + $625 = $1250 monthly cash flow
Tax laws significantly favor multifamily investments. Through these laws, a syndicator can capture accelerated depreciation and bonus depreciation benefits and pass those tax benefits through to the investors on their K-1 statements. By offsetting your other income, you can keep more of what you earn throughout the year. (For more information, please consult with your CPA. Each personal situation is unique and will require input from your personal tax consultant. REEP is not able to provide tax or accounting advice.)
Single Family Rentals
Single Family Rentals within the Texas Triangle are a very different story. Population explosion and supply chain shortages are driving up home prices – not to mention the impacts of rising mortgage costs. These factors are all creating barriers of entry to this market. Investors are presented with typically presented with two options – a fixer-upper that will require a great deal of time and energy to get it ready for occupancy or a move in ready home that will cost a great deal more than its counterpart.
Neither option is ideal. With a fixer-upper the initial purchase price is lower, but the rehab budget can be significant and will thus tie up a significant amount of capital. With a move in ready home, the initial purchase price will be higher thus requiring a larger down payment.
With the explosion of housing demands in the Texas Triangle, we are seeing soaring prices and limited inventory. Within multifamily, the rental rates are trending upward to match this rise. However, the price increase of move in ready, single family home prices is greater than the current increase in rental rates. This is creating a scenario where it is nearly impossible to charge a rent high enough to cover the mortgage – let alone include a budget for repairs and vacancies. Since occupancy and maintenance expenses are unpredictable, this creates a challenge to predict what your monthly positive cash flow would be, if any.
These factors are driving up the demand for fixer-uppers. If you enjoy this type of hands-on investment, then a single-family rental property might be for you. There is a great deal of housing demand for those who want to put in the long hours and have the capital on hand to renovate a house. But for those you are looking for a turnkey, easy investment the single-family market is a very difficult path in the current market.
Which is the best choice for you?
Each investment is unique, just like each investor. There is no right or wrong choice. It all comes down to which fits you, your needs, your budget, and your goals the best.
Single Family rental real estate does have some advantages but requires more time and commitment making it a less passive form of investment. If you’re seeking a more passive Real Estate investment, consider investing in Real Estate syndications.
We are here to help – REEP Equity provides a fully vertical integrated platform to meet your passive real estate investment goals. If you would like to visit with our team further and learn about the value our vertical integration provides to your investments, please let us know.
Join us in celebrating our 10-year anniversary of multifamily investing and learn why we are so passionate about what we do.