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Repair Headaches
Finding a good deal often involves buying a fixer-upper and renovating it to force equity. Read: more work.
You have to negotiate with contractors, oversee their work, and send them back in to fix the things they didn’t do right the first time around. You have to pull permits from your local housing authority, hassle with inspectors, and redo more work.
All while potentially juggling a draw schedule with your lender, and coordinating with their inspector to get reimbursed for work in phases as you go along.
Oh, and you get the privilege of paying the investment property mortgage by yourself until renovations are complete, you secure a use and occupancy permit, and advertise and rent the property.
Property Management Headaches
Laypeople love to hate landlords. They have no idea how much of a pain in the rear it is to manage rental properties.
There’s plenty of work in filling vacancies, of course. That includes advertising units, showing them to prospective tenants, collecting rental applications, screening renters, signing lease agreements, doing pre-move-in inspections, and collecting security deposits and putting them in the legally-mandated account type.
But even after you sign a rental agreement, you have to actually collect the rent, and not every tenant likes to pay it. Some renters require a slew of phone calls, texts, and emails before they bother paying the rent — if they pay it at all. Some only pay the rent if you force them to pay it by filing for eviction.
Which is a process in itself, from rent court hearings to scheduling a date with the sheriff’s office and more. I’ve had evictions take 11 months before, all while the renter lived for free and I covered all the expenses.
You can hire a property manager, of course. But then you need to manage the manager, checking their work on screening tenants, making sure they’re actually inspecting the property twice a year, and double checking their invoices for hidden fees.
It’s not for the faint of heart.
Accounting Costs
When you own a rental property directly, it’s up to you to track all the income and expenses. From the basics like property taxes and insurance to every minor repair or maintenance cost to tracking your mileage, you have plenty of bookkeeping to do.
Then, come tax season, you get to fill out additional tax schedules such as Schedule E tax statements. Get it wrong, and the IRS comes a-knocking, audit in hand.
Again, you can pay an accountant extra to take on these additional headaches for you. But it’ll cost you.
Pro Tip: Our landlord software helps you automate everything from expense tracking to Schedule E tax forms. Give it a whirl.
High Cost to Sell
It cost you a ton of money to buy the property — and it’ll cost you many thousands more to sell it.
From paying a real estate agent to paying transfer taxes, and recordation fees to settlement attorney fees, prepare to pay.
Oh, and remember how I said you can sell whenever you want? That’s sort of true, but you need to actually find a buyer. That can take months, especially if you want full market value for your investment property. Which, of course, you do.
Passive vs. Active Investing: Real Estate Syndications
The average investor is far less familiar with real estate syndications than rental properties.
So, how do they compare with buying a rental property by yourself as an active investor?
Completely Passive Investments
These group real estate investments let you buy into large commercial properties such as apartment complexes, self-storage facilities, mobile home parks, retail properties, or industrial properties as a silent investor. In passive real estate investing, you write a check and effectively become a fractional owner.
As such, you’re entitled to your share of the cash flow and profits upon the sale of the property.
You don’t have to go out and try to find bargains on properties yourself. No direct mail campaigns, no driving for dollars, no knocking on doors.
Nor do you have to arrange financing, or oversee renovations, or wrangle contractors and tenants and property managers.
Instead, it’s as passive as investing in stocks or bonds or REITs. After buying in, you just sit back and enjoy the distributions and returns.
Easy to Review Deals
To evaluate a potential property investment, active investors typically walk through the property themselves and conduct several inspections. You then have to do a complete market analysis on both property values and market rents for comparable properties.
If you’re wise, you also run the cash flow analysis through a rental income calculator. (I wasn’t wise when I first started investing in rental properties — and it cost me dearly.)
With real estate syndications, you can review the deal in its entirety from the comfort of your couch. The sponsor (syndicator) has already done the market analysis, calculated the property’s cash flow, and forecast expenses and returns. You should review them, of course, to make sure you feel they’re conservative enough, but you don’t have to do it yourself.
With an hour’s analysis, you can typically make an informed decision about whether to invest. It takes a lot more than an hour’s work to do due diligence on a rental property.
Simple Accounting
Passive investors in a real estate syndication, known as limited partners or LPs, don’t have to do any of the accounting work. They don’t have to track income or expenses, track their mileage, or fill out page after page of tax forms.
Instead, they just get a K1 form from the sponsor each year. They add that bottom-line number to the appropriate line on their tax return. The end.
Accelerated Depreciation
When real estate syndicators buy a property, they almost always perform a cost segregation study. It reclassifies as much of the property as possible under different tax categories, with shorter depreciation periods.
The upside? You can write off more money for depreciation in the first few years of property ownership.
That in turn means that you often show a loss on your tax return, even as you collected real cash flow from the syndication. For example, you might have collected $3,000 in distributions, but showed a $10,000 loss on your tax return.
While it’s possible to conduct a cost segregation study on a single-family rental property, it’s expensive (usually $4,000–$5,000), so most investors don’t do it. That said, startup Rental Property Refund offers a service for around $1,500, specifically designed for single-family rentals.
(Relatively) Stable Cash Flow
When your tenant moves out from a single-family rental property, you lose 100% of your income. But you still need to make the mortgage payment, pay property taxes and insurance, repair and maintain the property.
Apartment buildings with 200 units are another matter entirely. At any given time, there are a handful of vacant units turning over. Likewise, the building requires ongoing maintenance along with regularly scheduled repairs and upgrades.
In other words, these expenses just run in the background at a constant low hum. Instead of choppy fits and starts, you get relatively smooth, predictable cash flow.
Options to Invest Smaller Amounts
When you buy an investment property by yourself, you have to come up with the down payment, closing costs, and cash reserves by yourself. That typically means tens, if not hundreds, of thousands of dollars.
While real estate syndications generally require a high minimum investment as well, you do have a few options to invest less. First, you can join a real estate investing club like ours, where members pool funds to meet the high minimum investment. In our club, for example, the minimum investment for individual investors is $5,000. We vet a new passive investment deal every month, and all deals are optional.
Some real estate crowdfunding platforms also make real estate syndications relatively easy and cheap to invest in. Think $10,000–$25,000 instead of $50,000–$100,000.
Though they don’t offer multifamily syndications, you can similarly buy fractional ownership in properties through platforms like Ark7 and Arrived for under $100. Ark7 even offers a secondary marketplace where you can sell shares at your leisure.
You do have some other alternative passive strategies for real estate investing. From real estate investment trusts (REITs) to diversified real estate funds like Fundrise to secured property loans like Groundfloor, you could invest as little as $10 in many of these platforms.
Options to Invest for Infinite Returns
Love the BRRRR strategy, and think it’s the only option to earn infinite returns on real estate?
Many real estate syndicators follow the exact same strategy, just on a larger scale. They buy a fixer-upper apartment complex, renovate each unit over the course of a year or two, then refinance it and return investors’ capital to them.
You get your money back, but you keep your ownership interest in the property. You keep collecting cash flow, and eventually when the sponsor sells the property, you get your cut of the profits.
And in the meantime, you can keep recycling the same investment money over and over again, in deal after deal.
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