Tired of Managing Single Family Rentals? There is a Better Way

If you are a busy professional and have been buying single family home (SFH) rentals, kudos to you for starting your real estate investment journey. As you have probably  discovered, real estate offers you substantial opportunity to build wealth. However, as a professional focused on your job, a buy-and-hold SFH strategy has some challenges. 

Firstly, if you live in a coastal state like California, you will be hard-pressed to find any viable buy-and-hold properties close to your home. You can buy out of state, but managing them is another whole issue, as you are completely dependent on a property management company. Securing a good property management company in a remote city may turn out to be like playing Russian roulette. Secondly, even when it works, as you buy more houses, you may find that it is not a scalable strategy. As you accumulate more properties, you may find yourself overwhelmed with too many bills to keep track of and too many property management companies to manage. Then there is the issue of liability.

Fortunately, there is a better way to take advantage of real estate benefits. You can invest passively in what are known as real estate syndications (RES). RES refers to a group of investors, who raise capital and buy a large real estate asset together. Generally the assets bought this way are commercial real estate, as they provide the better efficiency for the invested capital and thus higher returns. Some examples of commercial real estate are multifamily properties (apartment buildings), self-storage, Industrial, retail or office facilities. Multifamily properties are the most common property types to be syndicated. For the right investors, it offers the benefits of investing in real estate, without getting actively involved in management of the properties. Let us look at these benefits.

Benefits

Passive Income

When you invest in real estate syndications as a limited partner (LP), you are essentially investing your money, but do not need to play any active role in running or managing these properties, as that is handled by experienced partners called general partners (GP). What this means for LPs is that once they make the investment, they don’t need to do anything. But they get to enjoy regular income and then participate in substantial equity gains at the end of project.

Small Learning Curve

While it is strongly recommended that just like any other business, the prospective investors first learn about how the RESs work before they invest in one, they  don’t need to be real estate experts. They need a basic understanding of how it works. Then simply need to have a relationship with an RES sponsor they can trust and have some basic number analysis skills. 

Economies of Scale

As compared to SFH, Real Estate Syndications benefit from scale. For example, due to their size, the expenses are much lower in proportion to the rental income. Also, it is easier to access better professional advice, expertise and services, which do not cater to retail investors. This helps improve the overall efficiency of the project.

Invest Anywhere

When you invest passively, you don’t have to limit yourself to invest only close to your home. You can choose to invest in any area throughout the country which promises better opportunities without worrying about how to manage them. For example, California residents may invest in North Carolina or Texas markets instead of California without any extra work needed on their part.

Tax Advantages

RESs offer another benefit that is not usually available with SFHs. Any real estate investment usually creates depreciation, which helps offset your income from these investments for tax purposes. However, RESs may also offer additional bonus depreciation, which can be used to offset other non-W2 income like capital gains. The amount of bonus depreciation varies for each project, so check with your syndicator before investing.

Liability Protection

Another big advantage offered by investing as an LP in RES as compared to investing in SFHs is the liability protection. Owning and renting SFHs brings exposure to liability. When you invest as an LP, as member, you are excluded from any liability claims. The GPs maintain liability insurance to protect against any losses from any such claims.

Drawbacks

Though RES have many benefits over SFH investments, the discussion would not be complete without discussing the drawbacks of RES over SFH.

Lack of Personal Control

When you purchase a SFH, you are in full control of every aspect of the investment. You decide what to buy, how to manage and when to sell the property. But in case of RES, you do not have authority to make any such decisions and are completely dependent upon the syndicator. The investor is well advised to discuss these details with GP upfront before investing. 

The Investment is Illiquid

The GPs decide on when to exit the investment is made by GPs. If LPs want to take their money out before the exit is achieved, it is usually very hard for them to do so. So once an investment is made, they are stuck until the ned. So, before making an investment, LP should discuss with GP about the expected time-frame for the project. 

Success Dependence on the Quality of GP

While there are many factors that make a syndication project successful, the GPs are the most crucial factor. Therefore the LP is well advised to choose GP wisely.

Complexity in Taxes

The RES are usually structured as partnerships and during tax seasons issue K-1 forms. While, usually they do not pose any additional burden, but someone very new to filing taxes may be overwhelmed by them. Additionally, many times, RES are not able to issue K-1 forms before the tax filing deadline, and the investors need to file for extension. But filing extension is usually very easy, and it is not a big inconvenience.

Who can Invest

While RESs offer many benefits, they are not for everyone. For one, the investor needs to be able to trust the RES with his money. Unless the trust is established with the RES sponsor, it is better to not invest in to that RES. Generally these investment opportunities require the investors to be accredited. This means that they need to meet certain requirements in terms of minimum income and net worth to be eligible to invest in these investments. On top of that they require a certain minimum investment amount. This precludes a large number of investors from investing in such opportunities. 

In summary, while the opportunity to invest in Real Estate Syndications are not available to all investors, for the right investors, they offer a way to build wealth faster and easier than buying and holding single family homes.