Multifamily Syndications vs. Single Family Homes

Investing in real estate can be a challenge. You’ll need to take time to research, plan and wait to see any returns. Whether you’re interested in building an investment portfolio, diversifying your current one, or want to create a passive income stream, there are many reasons to consider real estate. Two of the most popular ways to invest are through multifamily syndications and single family rental homes. The question is which is better? In this article, we will discuss these two asset classes to determine which makes the most sense to invest in.

 

Single Family Rental Home Investing

For years, investing in single family homes was the entry point for real estate investing. Many people felt comfortable with this type of investing, as it was a similar process to buying a primary family home. You could then decide if you wanted to create rental income with tenants or flip the house to make a profit.

 

However, the capital required to buy an investment property is often a barrier to entry for many people. Although you can buy a primary home for as little as 3.5% down (FHA loan) or 5% down (conventional), you’ll need to put at least 20% down for an investment property.

 

Multifamily Syndication Investing

Multifamily properties are residential buildings containing multiple units. These units are rented to tenants to create cash flow. However, many investors lack the capital to simply buy an apartment building, which is where multifamily syndication investing comes into play.

 

Essentially, syndications allow investors to buy slices of these real estate deals. This means that you can access potentially greater returns and have better insulation from the market conditions for your real estate investment vs. single family properties.

 

Pros and Cons of Single Family Rental Home Investing

The main advantage of investing in single family homes is that you can have control over your real estate investment. You can choose to purchase a property in a neighborhood that you’re familiar with, you know the rental demand and you’re aware of property values. This can reduce your risk, and you may be able to save on maintenance and management costs by doing some or all of the work yourself. For example, you may decide not to have a property management company and deal with all aspects of tenant management yourself.

 

However, there are some potential downsides to this type of real estate investing. First, it can be costly to purchase and renovate a home, particularly if you want to buy in a specific neighborhood. You may also struggle to obtain financing or need to use the equity in your own home as collateral for the mortgage.

 

If you can secure financing for the property, if something goes wrong, you could end up personally on the hook for the debt. This means that lenders may come after your other assets including your own home to make up for the loss. Even if you can negotiate debt forgiveness with the lender, the forgiven debt is considered taxable income by the IRS, so you could end up with a hefty tax bill, which may leave you with bankruptcy as your only out.

 

Additionally, whether you are managing the property yourself or using a property management company, your income stream is at the whim of your tenant. If the tenant fails to pay their rent, you are out 100% of your revenue, Additionally, if the tenants cause damage to the property, you may need to go through a costly eviction process in addition to being personally responsible all repairs.

 

The Pros and Cons of Multifamily Syndication Investing

The main advantage of investing in a multifamily syndication is that you can diversify and minimize your risk, while positioning you for potentially higher returns. For further diversification, you can invest in multiple projects, providing that you meet the investment minimums for the specific project and platform.

 

Another advantage of this type of real estate investing is that the costs and potential returns are clearly detailed. You will know exactly what costs you’ll need to pay and what income you can expect to receive. For example, if you’ve invested in a multifamily syndication, you may receive a percentage of the rental income for each unit. So, if one tenant is behind in their rent, you are not likely to notice a massive drop in your income as you would with a single family rental home.

 

There is also the potential for higher returns and the prospect of better performance in a recession. Multifamily units tend to have a lower rent compared to single family homes and occupancy tends to remain steady even if there is an economic downturn.

 

The main disadvantage of investing in a multifamily syndication is that you have less control over the investment property. While you may be able to select the area you want to invest in, the property and all details of the business plan are up to the management team. You will also need to meet any investment minimums and be comfortable with the timeframes (hold period) of the syndication. So, while you can decide to sell a single family rental property if you believe the market is prime, you will need to wait for the minimum investment period for your syndication deal before all of your investment capital is returned.

 

Why Multifamily Syndications May Be the Best Option for You

Multifamily properties are one of the most stable asset classes in real estate investing and there are a number of reasons why it may be the best option for you. These include:

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Lower Initial Investment

Multifamily syndications can allow you to enter the real estate market for a lower initial investment. The minimums will vary according to the project or platform, but it is likely to be significantly less than buying a single family home.

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Resilience to Market Fluctuations

Multifamily properties tend to be more resilient in the face of market fluctuations and economic downturns. This resilience is due to factors such as the diversification of income sources from multiple units and the ability to adjust rents on a unit-by-unit basis. In contrast, the rental income from single-family homes can be more susceptible to market volatility, impacting an investor's cash flow during economic challenges.

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Steady Cash Flow

If you’re looking for a medium-term (3-10 years) investment that provides a steady cash flow, a multifamily syndication can offer a great solution. The management team will determine the costs and expenses of managing the property, but they are structured to provide distributions throughout the year based form cash flow of the property(s) and a share of the profits at sale, according to the terms of the deal.

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Built-in Diversification

Investing in a multifamily syndication inherently provides diversification within a single investment. With multiple units and possibly multiple properties within a syndication, your risk is spread across a range of assets, reducing the impact of any one unit's vacancy or financial challenges. In contrast, investing in single-family homes may require a more extensive and varied portfolio to achieve the same level of diversification, requiring more capital, time, and effort to achieve the same results.

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Lucrative Tax Benefits

Investing in multifamily properties can come with various tax benefits including pass through depreciation and bonus depreciation (albeit tax rules can change). For instance, depreciation on multifamily properties can provide substantial tax deductions, reducing your overall tax liability on annual distributions and upon sale. Additionally, there may be opportunities to take advantage of tax incentives related to affordable housing or energy-efficient upgrades in multifamily investments.

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Enhanced Profit Potential

Due to economies of scale, multifamily properties often offer enhanced profit potential. The ability to spread expenses across multiple units can result in higher cash flow and profitability. Additionally, as the property appreciates in value and rents increase over time, the returns on a multifamily syndication tend to outperform those of single-family homes.

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Professional Property Management

Managing single-family homes can be time-consuming and may require hands-on involvement, from screening tenants to handling maintenance issues. In contrast, multifamily syndications often come with professional property management already in place. This alleviates the burden of day-to-day management for investors, freeing up their time for other pursuits and reducing stress.

 

True Passive Income Stream

Multifamily syndications offer investors a truly passive income stream. Once you invest in a syndication, you can sit back and collect your share of the rental income without actively managing the property or dealing with tenant-related issues. This passive income can be especially appealing to busy professionals or those looking for a truly hands-off investment

 

In conclusion, multifamily syndications present a compelling case for real estate investors looking to diversify their portfolios, achieve passive income, and potentially earn higher returns. While single-family homes have their merits, multifamily properties often outshine them in terms of financial efficiency, scalability, reduced risk, and truly investing passively by letting experts manage the investment. For the busy professional, investing in multifamily syndications are worthy of serious attention.