Which Should I Choose: Rental Properties or Real Estate Syndications?

by | Jul 6, 2022 | Investing Advice | 0 comments

Most people think owning rental property is not only a piece of cake but the only way to “get your foot in the door” and become a real estate investor. Well, surprise! Rental properties can take up a ton of your time and energy. Whether you decide to rent out your home because you’re relocating or buy a four-plex and rent it out to college students each year, managing rentals can feel draining.

But isn’t “draining” the opposite of what’s supposed to be happening when you become a real estate investor? Shouldn’t your metaphorical financial cup be filling rather than draining?

Here’s the deal, as an investor in residential real estate, you are responsible for most of the work. It’s entirely up to you to find the property, fund the deal, renovate the property (if needed), interview tenants, and even perform maintenance. 

There is no Easy Street in residential real estate, even with a property management company on board. Then, to top it all off, you will have to repeat most of the above process when your current tenant’s lease expires, which could make you feel like you’re a hamster on a wheel! 

Why Investing in Single-Family and Small Multifamily Rentals Can Be a Lot of Work

Small multifamily rentals do 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, meaning you do not need to pay out of pocket. It’s also much easier to manage one property with multiple tenants than multiple properties with one tenant each. 

Sometimes as a landlord, you may choose to hire a property manager to help with your rentals. However, bookkeeping, strategic decisions, and maintenance/repair costs are your responsibility. You’re pretty much running a small business, and if you are also working a full-time job, it can quickly become overwhelming.

The Case for Passive Real Estate Investments

But what if there was a different, completely passive type of real estate investment available to you? These are professionally managed and operated investments, so you don’t have to deal with the three scary T’s  – Tenants, Toilets, and Termites. Oh my!

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 relying on professionals to take care of business. This allows you to quickly and easily scale your portfolio while mitigating risk.

3. Did You Say Tax Benefits?

Like when you invest in 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 on your situation.)

4. Limited Liability

When you invest passively through real estate syndications, your liability is limited to your investment amount. If you were to invest $50,000, your most significant 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.

5. Positive Impact

You make a difference in two to four families’ lives with personal investments, 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, safer, and more pleasant place for people to live and positively impacts the community and environment. And that’s something you just can’t gain from stocks and mutual funds.

Active Vs. Passive Real Estate Investments – Your Choice

Now that you’ve read through the top five ways syndications make investing in real estate more passive, which investment strategy is best for you? 

If you haven’t decided yet or if things still feel a little murky, we want to reassure you that you can take your time making this decision. You want to make a financial move like this with confidence and the full spectrum of information under your hat. 

On the one hand, you gain valuable experience if you decide to own small rental properties; however, they require time and hands-on work. On the other hand, if you choose to invest in passive real estate syndications, your time remains yours and you still get to earn cash flow and appreciation.

No matter what, investing in real estate will help you diversify your portfolio and mitigate risk. Plus, you’ll have the opportunity to positively impact families and the community no matter which type of investment you choose.


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