Are Rental Properties Or Real Estate Syndications Your Best Option?
If you’re like me and have decided that owning real estate is the key to building real wealth, your initial instinct may be to lean toward small rental properties. You might assume that if they’re close by or small enough, they will be easy to manage on the side while you continue to juggle your demanding career and the family you’re doing this all for.
Any experienced rental real estate investor, house flipper, or landlord will tell you - single-family and small multifamily properties require much more time and energy than you think! Investing in residential real estate can become a daunting challenge of its own where suddenly you feel overwhelmed and as if you’ve accidentally taken on too much responsibility but are too committed to back out.
With rental properties, you, as the investor and landlord, wear many hats throughout the seemingly never-ending process with each tenant and property. In a cyclical pattern, you’re responsible for finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance. Wash, rinse, repeat.
So many questions come to mind:
- Can you keep up with adequately managing a small rental property while juggling the shifts or on-call requirements of your work?
- How will you ensure you still have time (and energy) left for your loved ones?
- Is the time you spend managing these properties worth it?
- How can you best limit or control your liabilities and protect your assets as a landlord?
Why Single-Family and Small Multifamily Rental Investments Can Be More Demanding Than Expected
Small multifamily rentals 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. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each.
But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still in your court. You’re basically running a small business, which can be challenging while you’re preoccupied with patient charts and addressing medical needs at moments when people need you the most.
How Passive Real Estate Investments Save The Day
Alternative to hands-on rental properties, there are entirely passive investments in commercial real estate. These are professionally managed and operated assets, so you don’t have to deal with any of the three scary T’s - Tenants, Toilets, and Termites. If you’re honest with yourself, you don’t have time for any of that anyway.
Take a step back with me for one second - your initial interest in real estate came from a place of wanting passive income and an opportunity to create more freedom in your life. Of course, active investments won’t do that, but passive investments in real estate might help this dream come true. 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”? For example, in a syndication deal, as a limited partner, you make an initial capital investment and become eligible to collect cash flow distributions 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 focus on your career and your family.
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 quickly diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.
3. Did You Say Tax Benefits?
Like those you’re eligible for with personally owned rentals, you may qualify for pass-through tax benefits when investing in real estate syndications. On-paper losses and accelerated depreciation can offset the passive income from your real estate investments.
At the same time, you’ll likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your CPA on your personal situation.)
4. Limited Liability
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. For example, if you were to invest $50,000, your most considerable risk would be losing that $50,000. However, 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
With personal investments, you make a difference in two to four families’ lives, 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 friendlier place for people to live and positively impacts the community and the environment. And that’s something you just can’t gain from stocks and mutual funds.
Which is Right For You? Rentals or Syndications
If you’re on the fence between active and passive real estate investments, I can share with complete confidence that the experience you gain from owning small rentals is irreplaceable. However, your time is too, and your participation in passive commercial real estate syndications doesn’t require you to have any rental or landlord experience.
I commend you for carefully selecting a profession in which you can help people directly, make a positive impact in the community, and earn a high income in exchange for your knowledge and effort. The downside is that being a physician is stressful - the highs are very high while the lows are devastatingly low. Well, syndications are a little-known, very hands-off way to passively invest your money and generate real passive income while positively impacting communities.
Whether Investing in small rentals or syndications, real estate is a great way to diversify your investment portfolio and mitigate risk. Of course, you’ve probably followed all the rules up to this point - thrived through med school, aced the exams, partnered with the right people, and maxed out your retirement contributions. Still, you’re craving more impact, tax benefits, and diversification.
Real estate can be your next stair step toward building true wealth. However, the strategy you use should align with the free time and energy you have available and support you toward the lifestyle and freedom you crave.
There are numerous risks with owning physical real estate via private placements including weather and natural disaster risks, interest rate risk, operator and business risks, and overall real estate market volatility which can effect the performance of the investments. Investing in private placement securities entails a high degree of risk, including illiquidity of the investment and loss of principal. Please read the offering document before investing.
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