Would a Rental Property Investment or a Real Estate Syndication be More Profitable?

Does a rental property investment or a real estate syndication make more? Whew… this is the million-dollar question, isn’t it? If we could answer this one, we could all just pack up and go home.

Ask my Sister Rose, She’d Vote “Rental Property Investment”

Rose is my sister, she lives in Seattle. She lives quite comfortably in Seattle as a matter of fact. She’s been very clever with her real estate investments and has amassed several rental properties. She has a nice collection. Rose and I used to play marbles, and even back then she was good at collecting things…

I’ve never met anyone who enjoys being a landlord more than Rose. She’s good at it, likes her tenants, and is basically a whiz at the entire process.

It helps that Rose is also a workaholic and a high-achiever at everything she does.

Let’s do a side-by-side comparison of one of Rose’s properties in Washington and a typical multifamily syndication.

In one corner, we have the rental property investment...

Rose purchased a duplex years ago in the suburbs of Seattle for $300,000. Because it’s a duplex, it means there are two units that can be rented out. Rose put a $50,000 down payment and pays $2,100 in mortgage payments each month. Note* this includes the principal, interest, as well as taxes and insurance fees.

For Rose to turn a profit, she needs to command rent for these two units combining over $2,100. 

At the beginning, it was close - Rose could charge about $1,000 per unit. However with rent increases, Rose can now easily rent these units out for $1,200-$1,400 per, yielding roughly $500 cash flow per month.

In the other corner, we have multifamily syndications…

Let’s set the stage for a typical multifamily syndication with a 8% preferred return. If Rose put $50,000 capital towards the investment, she’d expect around 8% in cash flow distributions per year. This translates to earning around $350 per month each year until the hold time expires (usually 5 years down the line). 

ALSO we need to remember that the cash flow requires NO LABOR, that is Rose doesn’t have to do anything to keep this cash flow coming, unlike the labor-intensive process of being a landlord.

What it comes down to is this:

If Rose earns more than $500 for her multifamily syndication per month, then syndication earns more… and if less than that figure, then $500 then her rental property investment is the better deal, right?

Well… let’s think about this.

Circling back to the rental property…

In a good month, Rose turns a profit - $500. However, frequently an issue comes up. For example, last year one of the tenants didn’t pay rent. Boom, that’s a non-cash flow month right there. Then there’s HOA fees, utility fees, and a plumbing snafu - all totaling upwards of a grand.

That’s another two months of no cash flow.

The months an issue comes up - cash flow decreases… and sometimes Rose’s ledger can run in the red. She may have to pay out of pocket to cover the mortgage, and that’s not what Rose likes.

Back to you, Multifamily Syndication...

While on the average, Rose makes cash flow off her rental properties there are months where any one property can go in the red. The issue is, these months cannot be anticipated. In a best case scenario, Rose’s tenants are paying their rent and there are no surprise fees or repairs that need to be made, in which case she pulls in $500. 

But then those months that don’t follow that pattern… Rose foots the bill, not to mention digs her heels in and fix the problem. This takes not only an investment of money, but time as well. 

Real estate syndication offers stability that is just plain hard to come by in a rental property investment. Both syndications and rental properties have pluses and minuses. This of course depends on where you plan to buy, as well. If you want to buy locally but are squeezed out of the market due to high asking prices, you can easily invest anywhere in the country as a passive investor via a multifamily syndication.

As well, the type of residential unit also depends. Rose’s duplex requires more hands-on work than a turnkey single family home. So if your heart is set on purchasing a property to rent out, you can augment how much active work will be required in its management by being selective about the property class. A fixer-upper would be more active than a move-in ready home, for example. 

Of course, both of these examples are more time and labor-intensive than a multifamily syndication!

Apparently, even Rose decided one day that the idea of earning a cash flow, passively, had a nice ring to it. That’s the day she joined one of our syndications. She’s happy with the cash flow she earns through her passive investment in multifamily syndications combined with her rental property investments. So now Rose, my sister, is also one of my limited partners in our syndication.