Should You Invest In a Syndication or Buy Your Own Property?
If you’re new to real estate investing, you’ve probably wondered why you should passively invest in an apartment syndication when you could just go out and buy your own property.
That’s a great question, but unfortunately there’s no one size fits all answer. There’s a slew of factors to consider when making this decision ranging from your personality type (do you like being in control and hands-on?), your availability (do you have the time in the day to manage an active portfolio?), your experience (do you know enough to effectively operate a multifamily asset?), and your investment goals.
That last one is possibly the most important in the grand scheme of things, so it’s worth repeating.
What are your investment goals?
Are you seeking steady cash-flow checks offering a solid yearly return with little to no effort?
Perhaps you’re tired of your W2 job and want to make a switch that will allow you to fast-track your financial journey?
Then again, maybe you really enjoy the rush of closing a deal and you love the spurt of dopamine you get every time you flip a house.
There’s as many great ways to invest in real estate as there are stars in the sky, and each one when executed correctly can be massively effective.
So, really, the question, “Should I passively invest in a syndication or should I go out and buy my own property?”, can only be answered by you from the perspective of your unique situation.
Even though we can’t make the decision for you, here are four reasons why we think passively investing in apartment syndications is the best strategy.
Limited Risk
Risk, in this context, actually has two meanings!
One of the most powerful reasons to invest in large multifamily properties (as opposed to single family homes and small multifamilies) is their inherent stability. This is, in large part, due to their size.
Investors love real estate because the tenants living in these properties help generate monthly cash flow and help pay down the debt service. Two powerful levers that can generate massive returns over time. But these returns only flow when there are actually tenants occupying the units.
When the tenants vacate, well, from the moment they leave to the moment a new tenant moves in, you’re no longer generating cash.
This isn’t so much a problem with a 100 unit apartment building, because when one tenant moves out, there are still 99 others keeping the lights on. Contrast that with a single family where there’s only a single tenant occupying the property and you’ll notice something kind of scary happens when they move out…
All the cashflow dries up…
Scary.
This is one of the major reasons why apartment buildings had one of the lowest foreclosure rates during the 2008 crash (at less than .5%) whereas single-family investors largely got wiped out.
Apartment syndications offer another level of risk protection to passive investors: You don’t sign on the loan.
The keyword in Limited Partner is, you guessed it, Limited. Yes, you give up control over the operations of the asset, but in return, you aren’t liable should anything go wrong with the property.
Your risk in a syndication as a Limited Partner extends no further than the possibility of losing your initial capital (which is an inherent risk in any investment). Nobody can come after your personal assets.
The same cannot be said for the General Partners who are assuming all of the risk by signing on the loan and claiming personal responsibility should anything go awry. Now, of course there are such things as non-recourse loans, which offers a bit of protection to General Partner’s from reprisals from the bank, but that’s by no means a guarantee of protection should the GP act in ways the bank deems grossly negligent.
If that occurs, however, things have certainly gone off the rails and you might want to reconsider your choice of General Partner.
Operator Expertise
One of our core missions here at Invictus Capital is to reduce the complexity of real estate so more people can see just how simple it is for them to get involved in this powerful asset class.
Now, it would be a mistake to assume that because something is simple, it is therefore easy. That’s just not the case, and particularly when it comes to real estate.
The classic example is that of lifting an alligator over your head. In theory it’s relatively simple, just pick up the darn thing. In action, it’s actually quite difficult (I would assume, I don’t think I’ve ever actually seen somebody attempt this).
It’s no different in real estate.
The fundamentals of this industry are straightforward and relatively simple. It’s not terribly difficult to understand the systems and primary economic drivers that make for a great asset. Executing those systems, however, is not as easy as some YouTube gurus would have you believe.
That’s not to say some asset classes within real estate aren’t easier than others, mind you.
For instance, on the surface, buying and operating a single-family home is probably much easier than buying and operating a 200-unit apartment building. The problem is, all things adjusted to be equal, the risk-to-return profile of a large multifamily apartment building is significantly better than a small single-family.
So why shouldn’t you just go out and buy your own apartment building?
Well, because the stakes are so much higher in large multifamily, mistakes can be dire.
This is why you want to be certain you are partnering with a world-class operator. The magnitude of the systems, capital, and potential issues at play make it so that the individual operators can make a vast difference on the overall outcome of an asset.
Not so much in the single-family space where the difference between a Mom-and-Pop owner and a world-class operator, probably won’t move the needle overly-much.
If you want to take an active role in large multifamily, then it’s imperative you build up a deep well of knowledge, experience, and relationships.
Do you have the time, energy, and desire to dedicate the slew of hours necessary to gain these requisites? Depending on how you answer that question will ultimately go a long way in setting the trajectory for your overall investing career.
For most of the busy professionals trying to balance a life, family, and work that we talk to, the lifestyle afforded by passive investing is much more desirable.
Alignment of Interest
Piggybacking off the previous reason why you might prefer passive investing over buying your own property, there’s something important to be said about the inherent alignment of interest that occurs between the Limited and General Partners in a large multifamily syndication.
If you’re buying small residential properties, and you don’t have the time nor desire to field tenant phone calls in the middle of the night, you’ll probably have a third party property management company running the day-to-day operations.
If you zoom out a bit, you’ll realize that the General Partners in a syndication are functionally the third party property managers. The key difference, however, lies in the magnitude of returns at stake and how those returns are realized.
Your typical third party property manager for a small residential portfolio is only ever standing to make a couple hundred to a thousand dollars in a month. The margins on those returns just aren’t hugely significant which means they’ll need to take on projects at scale.
This creates problems in two ways:
- Are they really giving your property the attention it deserves or are they cutting corners to provide marginal service to their entire portfolio?
- Because the margins are thin, will your property manager be tempted to gouge on fees as much as possible?
Contrast this with how a General Partner is compensated.
First, the returns are potentially much larger. Depending on the deal, a GP can stand to make millions of dollars. With so much at stake, it’s unlikely (though not impossible) that the GP is going to skim a little off the top here-and-there.
But it’s not just the magnitude of returns that keeps General Partners honest. It’s the fact that the future of their business is driven by delivering on their investor’s expectations.
If the General Partner meets (or exceeds) their investor’s expectations than it’s significantly more likely those investors will either invest in future deals or recommend the operator to other potential partners.
General Partner’s who fail to deliver don’t stay in business very long.
Which ties into the second way that a GP is generally compensated for a multifamily syndication: The Exit.
Typically, the General Partner will receive an asset management fee over the life of a deal as compensation for managing the day-to-day oversight of the property. This fee is nice, but it probably doesn’t amount to life-changing sums of money.
Not of the sort that a GP might see at the successful exit of an asset where the returns suddenly become quite impressive.
Because the bulk of reward doesn’t arrive until the successful completion of the project, most General Partner’s aren’t going to risk sinking the boat early for just a little disposable income.
And that’s the big take-away: In an apartment syndication, your interests are very much in line with the General Partners. They are rewarded time and again for doing right by you, their passive investor. Which is to say nothing of the alignment that occurs when the GP actually invests their own money in the deal alongside the LPs.
Geographic and Asset Class Diversification
A powerful reason to passively invest in an apartment syndication is the fact that you aren’t limited to a single market or asset class in the same way you might be if you were on the active side.
What do I mean by this?
Well, take Invictus Capital for example: We are a vertically integrated firm, which means we have our own in-house property management team. This gives us control over our bottom-line expenses in a way that many other operators who are relying on third party managers simply can’t.
But it’s not without drawback.
The main issue is that we’re limited in which markets we can pursue opportunity based on the proximity to our crew. We can realize powerful synergies by keeping all of our properties within a certain vicinity of one another.
Our infrastructure, while great for our purposes, doesn’t allow for us to suddenly pick up and move our operation to whatever new, hot market is upcoming.
Furthermore, we’ve established our expertise as multifamily operators, which means we’re wary to hop into alternative asset classes because that is not where the full strength of our skill-set can be realized.
A Passive Investor is not limited in the same way.
Because they are not tied to a physical location, and they haven’t built teams and systems around a certain asset class, it allows great flexibility to pursue alternative markets, operators, and investment vehicles.
Perhaps there’s a smoking hot deal in North Carolina for a 182-mobile home community. Great! If you believe in the operating team and have the capital to fund the deal, there’s nothing holding you back from putting your money to work.
And that’s a great thing, especially in the state of the current market where finding killer deals are few and far between.
When you’re limited to a singular market (no matter how great that market is), there’s going to be a ceiling on how many deals you can realistically generate with a single operator within a certain time period.
Now, that by no means you have to diversify and explore other markets, operators, or asset classes, but it’s nice to know you can!
Should You Passively Invest?
Ultimately, there’s no right answer to this question.
How you answer this question depends entirely on your goals and desired end-state. If you like the idea of rolling up your sleeves and putting in the hard work necessary to learn this industry and grow an active real estate portfolio, then you should pursue that goal with focus and determination. If you do, we’re confident you can find success.
Then again, if you’re drawn to the idea of reaping above-average returns with an incredible risk profile without having to put in a ton of work, then passive investing in apartment syndications might be a great option for you.
Are you still unsure about which way to go? Shoot me an email at anthony@invictuscapitalventures.com and let’s talk through your unique goals and desires to see if we can find the right path for your investing future.
The only wrong choice is to do nothing, so go get after it!
