I’ve been investing in out-of-state rentals for a couple of years now. When everything is going as expected, the cash flow is great, and there’s minimal hassle. However, when unexpected issues pop up, our cash flow can tank and even dip into the red.
Recently, I sat down to take a closer look at the actual numbers for one of my rental properties and compared those numbers to what I would have made, had I invested passively in a real estate syndication instead. Take a look.
One thing that people ask me about all the time is, when I invest in a real estate syndication, can I really make a better return than if I were to invest in a rental property?
I mean, it makes sense right?
With a rental property, you’re doing a lot of work. You gotta learn how to do it yourself, and then you gotta find a broker, find a property manager, put in the paperwork with the lender, all of that stuff you’re doing on your own, so surely your returns will be better, right?
And that is exactly what I wanted to talk about today. I have here my property management statements for my personal rental properties, well, one of them, in Huntsville, Alabama. A fourplex that we bought about a year ago, and it’s been, you know, hit or miss.
Some months are really good, some months are not so good, and so I wanted to take a look back over the last few months and compare those returns to what I would have gotten, had I invested that same amount of money into a real estate syndication.
Okay, so this rental property, like I said, it’s in Huntsville, Alabama, and it’s a fourplex, so that means there are four individual units that are rented out between six and seven hundred dollars each.
We purchased this fourplex for $240,000, which I know to those of you who are living in places like Los Angeles and San Francisco and New York sounds crazy to be able to buy four units for $240,000, but that’s what it was.
So $240,000 for four units and so that means we put down right around $50,000 for the property, and our mortgage payments are around $1350 a month.
That includes the principal and the interest, and then together with the taxes as well as the insurance, then our monthly payment comes out to be $1731 a month.
So, we have to make sure that the income from the property exceeds $1731 dollars a month to make this investment make any sort of sense at all right?
Okay, so before I dive into these property management statements, I wanted to just give us
a benchmark to compare to.
So if I were to put that $50,000 into a real estate syndication with say, an 8% preferred return, that means that on that $50,000 I should expect around 8% in cash flow distributions per year.
So every month, that comes out to about $333 in cash flow. So if this property can do better than $333, then it makes all the work of running and maintaining this rental property worth it.
But if I can’t make more than $333, then that real estate syndication really might be a better investment because I’m putting in less work, and I’m making more money, which seems like a no-brainer, right?
So $333, that is the number to beat.
So it’s January of 2019 as I’m making this video, so let’s look back over the last four months. So first, December of 2018.
Now December of 2018 this property was fully occupied, but there was one tenant who didn’t pay their rent. So we only had three rents come in.
So the total income was $2035.
Okay, so then we had all these expenses. We have management fees, we have some HVAC service fees, we have some utility fees, and so when we add up all the expenses, the expenses are $660.
So when you take our income of $2035 minus our expenses of $660, you get $1375, which sounds great right?
If we could take home $1375, that would be a great investment. But of course, we can’t forget that we still have to pay our mortgage and our insurance and our taxes. Remember, that was $1731.
So, unfortunately, in the month of December, we actually lost $356 on this property, meaning it cost us $356 to have this rental property as part of our portfolio in the month of December.
All right, let’s take a look back one month further.
So now we’ve got November of 2018.
Okay, so now in this month, unfortunately we still had that one tenant who was not paying. So, they’re occupying the property so we couldn’t lease it out to somebody else.
We could have evicted them, but at that time we didn’t, so we had three units that paid in the month of November, and in the month of November we still had the management fees, and the utility fees and all of that, but on top of that, we had an electrical issue that we had to fix.
So, our total income minus expenses for the month of November came out to $1270.
So when we factor in the amount we had to pay for our mortgage and our taxes and or insurance, then our cash flow for the month of November was actually negative also.
It was negative $461. So so far it seems like this isn’t going so well, but let’s take a look back further.
Okay, so now we’re in October, so we’re stepping back further.
October, fortunately in October, all four units were paying their rent, so that gave us a nice bump up. So all of these units are renting between $600 and $650 each, so for the month of October, with all four tenants paying, we had a total of $2590 in income and then we had roughly the same expenses as the previous month so we had $624.
And so then our total net operating income was $1966. And so that’s above that $1731 that we pay for mortgage and taxes and insurance, and so our cash flow was actually positive that month, thank goodness, it was $235.
So it means on that property we made $235 that month, but if you remember, we had talked about with that real estate syndication, that monthly income is around 8%, sorry 8% per year, and so that comes out to about $333 a month, and so $235, while it’s good, it’s not quite as good as what I would have made, had I invested in the real estate syndication.
One more month, let’s take a look at one more month.
This is the month of September.
Now in the month of September, all four units paid, yay.
So all four units paid, and we didn’t have any significant maintenance issues, and in fact they were quite minimal, and so we had a total income of $2688, and then the expenses that month were pretty low.
They were $371, making our total net operating income for that property for the month of September $2317 which when you factor in the mortgage and the insurance and the taxes, then our total cash flow was $586 for that month.
So in the month of September we made $586, which is more, it’s over $250 more than we would have made, had we invested in a real estate syndication.
But again, that is just for the month of September.
If you remember the month of October was okay, the month of November, negative, and the month of December also negative.
And so that’s really the point I wanted to drive home, is that if you’re looking for stability with a minimal amount of work, that is what a real estate syndication really provides you.
If I were to put that $50,000 into a real estate syndication, I could be fairly certain
that I would be getting my $333 per month as long as all things go according to plan.
But with a rental property, there’s ebbs and flows. Some months, there will be more income and some months there might be maintenance issues that wipe out your cash flow.
And so that’s exactly what we see on our rental properties.
And so certainly you could buy a rental property that is stabilized and that gives you sort of that same stable income as a real estate syndication.
But in my experience if you’re buying in a developing area, so those B and C class properties, there is some of this work to be done along the way because you are going to see some of that tenant turnover, and you’re going to run into some of those maintenance issues.
And so that’s it, those are the two things that we’re comparing here today.
We’ve got the real estates syndications on one hand, low work, pretty stable month to month income, and then on the other hand, we’ve got the rental properties.
There’s a potential for greater income, especially once you’ve stabilized the property and over the long term, but as you can see month to month, there can be a lot of work and there can be some ups and downs so you’ll have to be comfortable with some months having no cash flow, and some months having negative cash flow, you’ll have to put more money into the property.
And so is there a right answer for everyone?
As you can see I do a little bit of both.
I tend towards the real estate syndication side of things, I like that better because with two young kids, I prefer no muss no fuss kind of investing, but I also see the benefits of investing in rental properties too, it just happens to be more work, and not always predictable.
So I hope that has given you some insight into a real life property, so I hope that helps as
you are making the decision as to what is the best path for you.