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 cash flow. 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, over time, I’ve developed a portfolio containing both types of investments, so I’m able to honestly answer this question.
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.
A great example to work from is my 7-plex in Houston that cost $600,000 at the time of purchase (great price for the market). Each of the seven units rent for between $900 – $1000 a month. I put $150,000 down and wound up with mortgage payments around $3000 a month. If you add up taxes and insurance, our monthly obligation comes out to $4000 a month. On top of that, I have to pay the property management company 10% of the gross rent. So my cash flow is around $2000 a month (not bad). The only catch is that I have not had a single month where the properties are fully occupied and I have had to replace the washer/dryer in two units. I have to interact with my property manager at least 2-3 times a week. I have to maintain the books for tax purposes.
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. I think i will come out ahead at the end of the year but I am not sure the amount of time I spend is worth the returns I am getting.
So, Which is Better?
There’s no right answer for everyone. As you can see, I still invest in both types of properties. There’s value in both.
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 cash flow, then a real estate syndication might be your best bet.
