The Truth About Real Estate Syndications vs. Rental Properties

by | Oct 18, 2021 | Uncategorized | 0 comments

If you are someone who owns or has owned single-family or small multifamily rentals, you know how much time and energy these investments require. As a residential investor, you are fully responsible for all paperwork, repairs, financing, funding, tenant issues, maintenance, and more. 

What most people, including new or wishful rental property investors, don’t realize is that the responsibilities do not stop there. Every time a tenant’s lease is up or you want to buy or sell a new property, the entire process begins again. 

For generally conservative and risk-averse investors like us who take plenty of time upfront to evaluate a deal, the continual work to manage a small rental property quickly gets out of hand. 

Why Residential Investments Are So Much Work

If you are in the business of renting out single-family homes and one of your tenants move out, there is no one paying rent and helping you fund the mortgage for that property. Small multifamily rentals like duplexes and quads have some benefits compared to single-family rentals; mainly, if one tenant moves out, you can still rely on your remaining tenants’ rental income. Plus, with multifamily rentals, you’re able to lean on an “economies of scale” model. In other words, it is less work to maintain a single property with several tenants vs. multiple properties with one tenant each. 

Regardless if you manage small multifamily or single-family rentals, everything associated with bookkeeping, finances, upkeep, and overall business decisions are your responsibility and can easily amount to an accidental full-time job. 

After managing a couple of duplexes and a condo rental ourselves, we quickly realized that it would take us too much time and an extreme amount of effort to achieve financial freedom if we kept playing small. There had to be something else out there. 

The Passive Approach to Real Estate Income

On the contrary, there are commercial real estate investment options that provide a much more hands-off experience to generating passive income. In fact, once investors become familiar with commercial syndication investments, they tend to lean toward real estate syndications over residential real estate rentals for many reasons.

1. Time Commitment

When you invest in a commercial real estate syndication, there will be no need for you to manage the upkeep of the property, screen tenants, or worry about repairs. The general partnership team members in the group will work with a property management company and contractors on your behalf. This way, you, as a limited partner investor, do not have to put in the extra work or time beyond initially finding and funding the deal. 

Being part of the limited partnership in a real estate syndication truly allows you to invest your money and then sit back while it (and the general partnership team) goes to work for you, generating passive income.

2. Diversification

By opening your mind to a wide range of real estate syndication opportunities, including investing with various sponsors in different asset classes, your real estate portfolio can be quickly diversified. Meanwhile, you did your due diligence upfront, researching the market, the sponsor team, and their track record, so you can unwind from your stressful life knowing you are partnered with experienced sponsors who are committed to properly executing the business plan in your best interest. 

Real estate syndication opportunities allow you to scale your investment portfolio and passive income potential while limiting your risk. As you invest in different types of commercial real estate in various locations across the US, you’re spreading your risk and increasing diversification.

 

3. Taxes

When you invest in commercial real estate, you gain access to pass-through tax benefits that are generally unavailable to residential real estate investors. Accelerated depreciation is reflected on your K1 each year at tax time, which means there’s a strong likelihood that the quarterly distributions you earned can be written off, meaning your passive income will be tax-free during the holding period.

When the property is sold, you’ll likely owe taxes on the profit payout, but always consult with a CPA.

 

4. Liability

When you invest as a limited partner in a commercial real estate syndication, your personal liability is only the amount you invested into the property. This means, if you invest $50,000 into a multifamily syndication as a limited partner, you’re only liable to lose that $50,000. 

Your personal home, other rentals, and other assets are not at risk, which is quite the opposite of the level of liability you face as an owner or small residential real estate rentals.

5. Scaled Impact

Within any real estate investment, you not only make a difference in your own life but you are also impacting other people and their families. Whether you have several single-family homes, a triplex, or an entire condominium complex with hundreds of doors, you have the opportunity to infuse positivity into people’s lives. 

When you invest in the overall improvement of large commercial properties, you have a hand in creating pride in those who live in and nearby, attracting new business and people to the area, and generating a better way of life for all involved. The bigger the property, the more lives are positively impacted.

Which Type of Real Estate Investments Are Right For You?

Whether you’re leaning toward active or passive real estate investments, the knowledge and personal growth you’ll obtain from that experience is invaluable. It’s worth noting, however, experience with residential rental real estate is not a prerequisite to investing in and earning passive income from commercial syndications.

No matter which way you go, investing within the real estate market gives you the ability to give you the experience and cash flow you desire, while also positively improving other peoples’ lives along the way. It’s ultimately up to you to evaluate your personal financial goals and think about the scale on which you want to make an impact. 

Do you want to actively manage the tenants, maintenance, and liability of small rental properties as your source of income? 

Or do you want to just invest capital while maintaining daily freedom to live and work as you please while your money generates passive income? 

How long will it take and how much investment capital will you need to create the investment income you need to achieve your financial goals?

The answers to these questions will help you determine whether commercial real estate syndications or residential real estate rentals are best for you.

 

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