By Joe Firmin 5-minute read
This question comes up a bunch. Which investment provides a better return? People want to know if investing in their own rental properties is more lucrative or if real estate syndications are the best choice.
A big part of this question comes from understanding whether or not you want to be an active or a passive investor in real estate. For more on that, read this article we wrote. Real estate syndications’ major benefit of being a true hands-off investment, saves investors from the stress of maintenance issues, tenant complaints, and bookkeeping. That right there can make you feel like syndications are a better deal (who wouldn’t want to avoid that stress and hassle!?).
On the other hand, with your own rental properties, you have to do all the grunt work. That includes finding an agent or broker, a lender, a property manager, handyman and contractor, lawyer, etc. You also do all the accounting/bookkeeping, get the calls if something goes wrong with the property, etc. So, in exchange for all that hard work, you’d expect better returns, right?
So let’s dive in.
Real Estate Syndication
First let’s review what a $50,000 real estate syndication deal would look like cashflow-wise, just so we have a comparable reference.
If I were to invest $50,000 into a real estate syndication with an 8% return, that equates to about $333 per month in cash flow.
$50,000 x 8%= $4,000 / 12 months = $333 per month
If I could make $333 per month with a $50K investment in a real estate syndication, then a real estate rental that requires sweat equity would need to provide me more than $333 each month in order to be worth it overall. Simple? OK. Let’s talk about rentals.
Rental Real Estate
Now, let’s have a look at a good-sized rental property.
A really sharp real estate investor friend of mine has a four-plex in Alabama that cost her $240,000 at the time of purchase. This is her story… Each of the four units rent for between $600 - $700 a month. She put $50,000 down and wound up with mortgage payments around $1,350 a month. If you add up taxes and insurance, the monthly obligation comes out to $1,731 a month.
The whole point of owning rental property is that the rent you earn is greater than the mortgage and bills you owe on the property. In other words, the rental needs to have some cash flow in order to work.
On a month where all four units were occupied, except one didn’t pay, she had 3 rent payments come in for a total of $2,035 before expenses. Expenses for this example month included management fees, HVAC service fees, and utility fees which total $660.
$2,035 - $660 = $1,375
$1,375 sounds great, right? If she owned the property free and clear, it would be great to pocket $1,375, but she has to pay the mortgage. Remember back when I said the mortgage plus taxes and insurance was $1,731?
This means for the month of December of 2018, she actually lost money (-$356 to be exact) on this rental property.
Almost nothing’s the same month-to-month, and there have GOT to be some good months. So. we need to examine a few more windows of time to really gain a clear picture. Let’s rewind a few months…
This was yet another month where there were four occupying tenants but only 3 rents being paid. November’s expenses included the regular management fees, utility fees, plus an electrical repair.
The total income minus expenses came out to $1,270, which, as you know, didn’t cover the mortgage payment. She was in the hole $461 that month.
Fortunately, in October, all four tenants paid rent, which brought in $2,590. The expenses were about the same as November’s (above) which brings the net operating income for October to $1,966.
After paying the mortgage, taxes, and insurance of $1,731 on that property, the cash flow was $235 beautiful, positive dollars (Boom Baby!).
If we go back one more month to September, we see another month where, thankfully, all tenants paid. In this month she had minimal maintenance issues so the income of $2,688 resulted in $586 positive cashflow after all expenses and the mortgage payment.
$586 is fantastic -rolling in the Benjamins... But remember, this is only one of the four months that showed this much profit.
Rental Property Review
Her investment of $50,000 on a rental property yielded cashflow (rents paid minus property expenses, mortgage, taxes, and insurance) of $586 in September, $235 in October, -$461 in November, and -$356 in December. The overall result of those four months, 2 positive and 2 negatives, was a cash flow of just $4. Yup, you read that right… Four Washingtons… sadly, not Benjamins.
Rental properties require ebbs and flows. Tenants come and go and maintenance expenses are unpredictable. If you’re really interested in consistent cash flow in exchange for minimal work, rental properties aren’t going to be your cup of tea.
Rental properties might be for you if you really want a hands-on investment and if you’re okay with having some tough months in exchange for those with positive cashflow. You’ll just have to do everything in your power to ensure most of the months are positive to make it “worth it” long term. Another key – you’ve got to buy the property right, meaning at a good discount, so your mortgage payment is low and you have more positive cash flow months than negative.
So, Which is Better?
There’s no right answer for everyone. We invest in both types of properties. We’ve also spent years developing the relationships to receive great deals and the systems to ensure more positive cash flow months. There’s value in both, they can both be lucrative if done right.
Rental real estate does have the potential for great income - if the stars align and you have a fully occupied property with low maintenance costs, tenants that pay rent and no evictions. There’s no such thing as a maintenance-free property though, and to boost rental rates, you’ll want to do some improvements here and there.
For a no-hassle, non-time-sucking investment with consistent cashflow, a real estate syndication will be your best bet.
If you’d like to learn more about investing in real estate syndications, please sign up for our True Freedom Investor Network. It’s free to join with no commitment. It’s also the only way we can send you investment opportunities. Join now!