About 10 years ago, my husband and I bought our first home. Contrary to most people’s first home experience, we never bought, and still to this day have never owned, a single family home.
Instead, our realtor at the time floated the idea of purchasing a duplex, which is quite common in Washington, DC, where we were living at the time. DC’s many rowhouses often include an English basement or in-law suite on the bottom floor, complete with its own kitchen and separate entrance.
Someday, our realtor said, if we played our cards right, we might be able to get the property to be cashflow positive. In other words, the rent that we brought in each month might surpass the mortgage we were paying.
Wow, that sounds pretty good, we thought. Having tenants pay us to live for free? We were hooked.
From that first duplex on, we proceeded to buy 28 additional units, all in small multifamily rentals. Some we managed ourselves, but most we hired professional property managers to manage.
Why Investing in Multifamily Rentals Can Be a Lot of Work
Small multifamily rentals certainly have some advantages over single family homes, though they can still be a fair amount of work. In a multifamily, if one tenant moves out, the tenants in the other units are still there to help pay down the mortgage. Multifamily also allows us to leverage some economies of scale, though not much.
For example, for a fourplex, we have one roof to maintain, versus four individual roofs for four separate homes.
When repair and maintenance issues come up, we are still involved, even if it’s just a quick nod of approval.
There’s bookkeeping to be done, tenants to approve, and marketing to consider.
As our portfolio has grown, we’ve found that owning a portfolio of multifamily homes is fairly hands-on, even with a property manager. It’s like running a small business.
Further, because we own small residential properties (versus commercial properties), each property is market-dependent, meaning its value depends on comparable properties in the area. If a duplex down the street sells for $500,000, ours would likely be valued around the same, even if we’re able to generate more income through our property.
As we’ve scaled up and added more properties to our portfolio, I no longer believe that owning investment properties is purely a passive investment, like investing in stocks. Instead, I see it more as a small side business. Sure, there’s not much steady day-to-day work, but we’re still involved in the operations and major decision-making.
The Case for Passive Real Estate Investments
On the flip side, you have fully passive investments in commercial real estate, which is where we’re starting to shift our portfolio. These are investments that are professionally managed and operated, where we can write a check and then sit back and collect returns. No tenants, toilets, or termites to deal with.
According to Forbes, once investors begin to understand passive commercial real estate investments, it’s not uncommon to see them move away from owning small rentals to re-deploy their capital across a number of larger deals.
Here are the top five reasons we love investing passively in real estate syndications, and why you should invest in them too.
1. You don’t have to put in much time.
Investing passively means you put our money in, see cashflow payouts during the life of the investment, and get a share of the profits upon sale of the property.
It’s a “set it and forget it” type of real estate investment.
There’s no need for you to drive to the property to fix toilets in the middle of the night, screen tenants, or deal with maintenance requests. The deal sponsor team, together with the property management team, are the experts who will take care of all of that, so you can sit back, enjoy the returns, and focus on living your life.
2. You get to diversify your portfolio.
It takes a LOT of time to become an expert in a market, particularly when it’s not in your backyard.
By investing with experienced deal sponsors with proven track records, you can not only leverage their expertise in improving the asset, but you can also diversify into different markets and different asset classes while resting assured that the professionals are taking care of business.
3. You get pass-through tax benefits.
Just like the tax benefits of investing in personally owned rentals, you get similar pass-through tax benefits when investing in real estate syndications.
What this means is that you will most likely show paper losses, even while you’re receiving ongoing cash flow distributions. Often, this can mean that you can defer taxes on those cash flow distributions until the asset is sold and the depreciation is recaptured.
4. You limit your liability.
With personally owned properties, if things go really south, guess who’s on the hook? You guessed it. It’s your bank account and other assets on the chopping block.
When you invest passively through a syndication, however, your liability is limited to the amount you invest. If you invest $50,000, your biggest risk is losing that $50,000, but you can’t lose anything beyond that (which, I totally get, is still a huge amount). You are not on the hook for the entire value of the property, and your other assets would not be at risk.
5. You get to make an impact.
This is perhaps our favorite part of investing in real estate, and especially in commercial real estate syndications.
Whereas with our personal investments, we’re making a difference in two to four families, with a syndication, we have the opportunity to scale our impact, to change the lives of hundreds of families and whole communities.
Each syndication we invest in creates a cleaner, safer, and nicer place to live and brings positive impact to the community and to the environment. And that’s something you just don’t get from other types of investments, like stocks and mutual funds.
If you’re on the fence as to whether you should invest actively in a small rental property or invest passively in a real estate syndication, I can tell you that owning small rentals can be a very valuable experience. We’ve certainly learned a TON over the years through owning our own rentals.
However, owning rental properties is not a prerequisite to investing passively in commercial real estate.
If you have a good amount of time on your hands and want to roll up your sleeves and experience owning your own rental property, there’s nothing like it, and I heartily support you.
If, on the other hand, you’re not interested in learning the ins and outs of real estate and lack the time to find and support your own rentals, passive investment might be the way to go. If you’re still conflicted, check out our Active vs. Passive Investing Quiz.
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.