Single-family and multifamily rental homes are great for preserving and generating wealth, but in exchange, they require your direct commitment, time, energy, and capital, which is why many real estate investors start to feel tapped out – exhausted of the freedom and vibrancy that “investor life” is supposed to provide.
Maybe you got into real estate in search of stability, tangible assets in which to preserve wealth, or to generate monthly cash flow, but you probably didn’t fully realize the challenges associated. Or maybe you did expect challenges but they aren’t exactly fitting into your lifestyle.
Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up, requiring you to be ever present and, in many cases, local to your rental properties.
Why Investing in Single Family and Small Multifamily Rentals Can Be a Lot of Work
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 if you are also working a full time job, raising children, or both!
The fact is, most real estate investors get started with single family rentals and when they begin to feel like either their capital, their time, or their energy is maxed out, they begin exploring other options to expand or transfer their investment portfolio into a more passive opportunity.
The Case for Passive Real Estate Investments
Commercial real estate investing, the way we do it, offers completely passive opportunities to secure and grow your capital without requiring your time commitment. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s – Tenants, Toilets, and Termites. ¡De una!
And it’s okay if this is a new concept for you and your investment strategy. We made this transition too and are here to guide you the entire way. All it takes is a little education on how to become a passive investor for your fears to subside. In fact, 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”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.
You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.
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 easily 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?
Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!
You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own 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. If you were to invest $50,000, your biggest risk would be losing that $50,000. 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 one to four families’ lives, which is wonderful. 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 more updated place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications.
Speaking from 10 years experience in single family rentals in Colombia and our experience in converting that portfolio into US commercial real estate, we attest that syndications are the best way to meet our goals of preserving wealth, embracing stability, and enjoying the vibrant life of our dreams.
Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community.