Which Makes More Money, Rental Properties Or Real Estate Syndications?

After investing in out-of-state rentals for a few years, I realized that unexpected issues can cause a decline in cash flow. So, I decided to compare the actual numbers of one of my rental properties to what I could have earned passively through a real estate syndication. Here are my findings.

Video Transcript

Investors often ask whether investing in real estate syndications can yield better returns than investing in rental properties. The assumption is that with rental properties, investors have to put in a lot of work, from learning how to invest, finding a broker and property manager, to dealing with lenders. Thus, it seems logical that real estate syndications would generate higher returns.

However, this assumption is not necessarily true. Property management statements from a personal rental property in Huntsville, Alabama, reveal that owning a rental property can be challenging and unpredictable. The fourplex property has had its ups and downs, despite efforts to manage it effectively.

Ultimately, the decision between investing in real estate syndications or rental properties depends on an individual’s goals, experience, and risk tolerance. Both options offer their unique advantages and disadvantages, and it is crucial to research and evaluate the options carefully before making any investment decisions.

The author wanted to compare the returns of investing in a rental property versus a real estate syndication. They decided to look at their property management statements for their personal rental property in Huntsville, Alabama – a fourplex that they purchased a year ago. The property has been performing inconsistently with some months being better than others.

The fourplex has four units that are rented out for between $600 and $700 each. The property was purchased for $240,000, which may seem low to people living in expensive cities like Los Angeles, San Francisco, or New York. The down payment for the property was approximately $50,000, and the monthly mortgage payments are around $1,350, including principal and interest. When combined with taxes and insurance, the monthly payment is $1,731.

To make this investment profitable, the author needs to ensure that the monthly income from the property is greater than $1,731. This analysis will help determine if investing in a rental property provides a better return compared to a real estate syndication.

To provide a benchmark for comparison, the speaker mentions investing $50,000 into a real estate syndication with an 8% preferred return. This would result in approximately $333 in cash flow distributions per month, which is the amount that needs to be exceeded for this rental property investment to make sense.

Looking back over the past four months, the speaker begins with December 2018. The property was fully occupied, but one tenant didn’t pay their rent, resulting in only three rents coming in for a total income of $2035. After deducting expenses such as management fees, HVAC service fees, and utility fees, the expenses amount to $660, leaving a net income of $1375.

While $1375 sounds great, it’s important to remember that the mortgage, insurance, and taxes still need to be paid, which amount to $1731 per month. Therefore, the net income of $1375 is not enough to cover the expenses, resulting in a negative cash flow of -$356.

The speaker emphasizes the importance of beating the benchmark of $333 in monthly cash flow from a real estate syndication investment. Based on December’s performance, this rental property investment is currently not meeting that benchmark.

To compare the returns of the rental property to a real estate syndication, the investor sets a benchmark of an 8% preferred return, which would amount to about $333 in cash flow per month on the initial investment of $50,000. If the property can generate more than $333, it would make the effort of managing the property worthwhile; otherwise, the real estate syndication would be a better option. The investor takes January 2019 as the starting point to evaluate the property’s performance.

In December 2018, one tenant did not pay rent, and the total income was only $2035. After deducting the expenses of $660, the net income came to $1375. However, with the mortgage and insurance payments of $1731, the property incurred a loss of $356 in the month. Moving to November 2018, the same tenant did not pay rent, and an electrical issue added to the expenses. As a result, the property’s cash flow for the month was negative $461.

In October 2018, all four units were rented, bringing the total income to $2590, with expenses of $624. The net operating income was $1966, which was higher than the mortgage and insurance payments of $1731, resulting in a positive cash flow of $235 for the month.

Overall, the rental property’s returns have been mixed in the last few months. While October generated a positive cash flow, November and December resulted in losses. The property’s profitability will depend on the occupancy rate, timely rent payments, and maintenance expenses. The benchmark of $333 in cash flow per month, based on an 8% preferred return, serves as a reference point to evaluate the property’s performance.

The speaker discusses their experience with owning a rental property versus investing in a real estate syndication. They note that owning a rental property comes with ebbs and flows in income and expenses, whereas investing in a real estate syndication provides stable income with minimal work.

In December of 2018, the rental property lost $356, meaning it cost money to keep the property in their portfolio. In November, there was one tenant who did not pay, and the speaker had to pay for management and utility fees, as well as an electrical issue. The cash flow for November was negative, at -$461.

In October, all four units were rented out and all tenants paid, resulting in $1966 in net operating income and a positive cash flow of $235. In September, all tenants paid and there were minimal expenses, resulting in a net operating income of $2317 and a positive cash flow of $586.

Overall, the speaker emphasizes that investing in a real estate syndication provides stability and reliable income, while owning a rental property requires more work and can have unpredictable income and expenses. They note that buying in developing areas may come with tenant turnover and maintenance issues.

The speaker compares their actual experiences owning a rental property to the hypothetical scenario of investing in a real estate syndication. They explain that the monthly income from a real estate syndication is around 8% per year, or about $333 per month. While they made more money in September on their rental property, they note that there are ebbs and flows in owning a rental property, and the stability of a real estate syndication is appealing.

Real estate syndications offer stable, low-work monthly income, while rental properties have the potential for greater long-term income but require more work and can have unpredictable cash flow from month to month, including negative months and the need for additional investment in the property. There is no one right answer for everyone, and the choice between the two depends on individual preferences and circumstances. The speaker personally leans towards real estate syndications due to the ease of investing with young children, but acknowledges the benefits of rental properties despite the extra work involved. The comparison of a real-life property helps provide insight for those deciding which path to take.