We will be looking at the tax benefits of real estate investing next. T.S. Elliot said April is the cruelest month.
Single Family House Rental or Apartment Syndication?
Which is the better investment, single family house rentals or apartment rentals? For example, my friend Tom is ready to make a real estate investment and apartment syndications has been an option he has been investigating. As an engineer, he is very methodical before making a decision about anything – whether it be avocado toast vs. oatmeal for breakfast or a single family home vs. apartment syndication.
I explained to Tom that while my husband Henry and I love purchasing single family homes to rehab, rent, refinance, and repeat). However since we discovered passive real estate investing in the form of apartment syndication we’re loving it!
Single Family House Rental (SFR) vs. Apartment Syndication: Basics
A single family house rental is typically purchased by an active investor. - Photo by Canva
An active investor typically purchases an SFR with the purposes of holding it long-term as a rental property. Usually the investor will hire a property management company to locate the tenants, manage repairs, and field day-to-day issues.
Single family homes are defined as real estate properties that house only one family. Properties that fall under this umbrella include but are not limited to: houses, condos, and townhomes.
On the other hand, real estate syndication is particularly attractive to passive investors (especially if you are an accredited investor, it means more options). The investor puts up capital to a Sponsor, who then acquires an apartment, hires the property management company, and all the other nitty-gritty details of managing and upgrading the property.
Multi-family homes are defined as real estate properties that have more than one unit. Consequently, these properties can house more than one family. Properties that fall under this umbrella include but are not limited to: an apartment building, duplex, or triplex.
Single Family House Rental (SFR) vs. Apartment Syndication: More Advanced
For apartment syndicates, depreciation and cost segregation can bring tax advantages in the form of paper losses. - Photo by Canva
Now that you’re familiar with the basics, let’s jump into the more advanced aspects of investing into either of these pathways.
Similarities: There are some similarities between SFR and Multi-family syndicates.
Both require upfront money. SFRs require a down payment, usually 20% (to avoid PMI) while multifamily syndicates require a minimum buy-in, usually $50,000.
SFRs and multifamily properties offer a good return on investment over the long term. In general, we see both investment properties generating at least 1% of the cost of the property per month. In turn, this yields positive cash flow.
Both SFRs and apartment syndicates provide tax advantages in the form of paper losses. For SFRs, tax deductions related to mortgage and property tax can be deducted to reduce taxable income. For apartment syndicates, depreciation and cost segregation can bring tax advantages in the form of paper losses.
Here’s where the differences enter the story.
The number one tool an appraiser relies on when valuing a single family house is comparable sales (comps). - Photo by Canva
Evaluating an SFR isn’t as complicated and involved as evaluating an apartment syndication. Apartments are highly-complex, falling into various asset classes. It takes a great deal of time to educate oneself on the apartment syndication process.
But don’t worry, that’s what I’m here for – to help you learn all you can about apartment syndication.
Scale: It’s easier to scale through apartment syndications than SFRs. After you’ve done your research and qualified a sponsor, you wait for the right deal to invest in. In contrast, each SFR investment could require months before you find the one that is a match to your tolerance to risk and investment goals. Another factor to scale is the matter of loans via traditional financing. For SFRs, there are a limited number of loans you can secure, whereas apartment syndications usually require a minimum of $50,000 to invest. As long as you have that cash for buy-in, you can go-in on a multifamily syndication.
Returns: This is the juicy stuff right here, value add, cash flow, equity, and appreciation. With apartment syndications, you see cash flow each month distributed by the sponsor and the equity comes full-circle when the sponsor sells the property. That’s when they distribute your original buy-in money along with a portion of profits from the sale.
Yes, I said “portion” of the profits. As you only have partial ownership of the property, you receive a smaller percentage of the profits than you would if you were the sole owner of an SFR.
This leads me to the next point, risk.
Risk: While you retain 100% ownership of the property in an SFR, you also incur 100% of the risk (as well as 100% of profits). While owning all the profits could have some upswing, consider this: an SFR is a single rentable unit. If you don’t have a tenant, it is 100% vacant. In contrast, if the apartment syndicate has a vacancy, it is merely a slice of the overall number of units available to rent. Additionally, the apartment syndication is less risky because you aren’t signing a loan. In addition, you are investing in multiple units in a centralized location (which can help offset management and contractor costs) vs having to scale dozens of SFRs in various markets.
“Passive income earners are constantly looking for ways to put more value into the hands of more people.” Steve Pavlina - Photo by Canva
Henry and I have a portfolio of SFRs with good rental cap rates. While neither Henry nor I are ready to quit our job yet(we love what we do), we do want to build wealth for our family as fast as we can, with as little effort possible.
Based on our experience, apartment syndication will get us there. I love the cash flow each month from our syndications, however the appreciation is even better. For example, when we renovate our SFR we renovate with the best of everything. From counter tops to floors, our goal is to make our SFR shine. However, no matter how much renovation we put into the property, we could never sell the house for 50% or 100% more than the houses in the surrounding neighborhood. Why? Because appraisers refer to comps, so a bank would never value our SFR much more than other homes in the neighborhood.
Surprise, surprise – this isn’t the case with an apartment syndication. For multifamily syndications, neither do banks nor buyers use comps. It’s the commercial real estate tools and indicators, such as cap rate, and IRR that they use. Therefore, in the apartment syndications the units could get outfitted with the best of the best (countertops, flooring) and the banks and buyers actually would value it.
What about you, do you have any experience in apartment syndications and SFRs? If so, share them in the comments!
Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
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