One question that comes up most often is, which investment provides a better return? People want to know if investing in real estate properties is more lucrative or if real estate syndications are truly the best choice.
Real estate syndications’ major benefit of being a true hands-off investment, saves investors from the stress of maintenance issues, tenant complaints, and dipping cashflow. That right there can make you feel like syndications are a better deal (who wouldn’t want to avoid that stress!?).
On the other hand, with rental properties, you have to do all the legwork. That includes finding a broker and a property manager and coordinating with lenders. So, in exchange for all that hard work, you’d expect better returns, right?
Thankfully, I’ve owned and participated in both types of investments, so I’m able to honestly answer this question. So let's do a little bit of math and dive in to find our answer...
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 about $333 per month in cash flow.
$50,000 x 8%= $4,000 / 12 months = $333
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.
Rental Real Estate
Now, let’s have a look at one of my rental properties.
Lets use an example from a four-plex in Alabama that cost $240,000 at the time of purchase. Each of the four units rent for between $600 - $700 a month. I put $50,000 down and wound up with mortgage payments around $1,350 a month. If you add up taxes and insurance, our monthly obligation comes out to $1,731 a month.
Let's assume the goal 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, we 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 I owned the property free and clear, it would be great to pocket $1,375, but I have 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, I actually lost money 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.
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. I 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 our net operating income for October to $1,966.
After paying our mortgage, taxes, and insurance of $1,731 on that property, the cash flow was $235 beautiful, positive dollars (thank goodness!).
If we go back one more month to September, we see another month where, thankfully, all tenants paid. In this month we 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. But remember, this is only one of four months that shows this much in profit.
Rental Property Review
My 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. You read that right. Four hard earned DOLLARS.
Rental properties require ebbs and flows. I can repeat this example story on multiple other investments made over the years. 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.
So, Which is Better?
As in life, there’s no right answer for everyone.
Rental real estate does have a potential for greater income - if the stars align and you have a fully occupied property with low maintenance costs and tenants that pay rent. 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-fuss investment with consistent cashflow, then a real estate syndication might be your best bet.
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