by Cypress Ventures Group
We were discussing real estate investing with some friends and they asked us what the pros and cons of buying an investment home opposed to investing in an apartment syndication.
Solo Investment
Ok, you say – let’s go solo and I’ll buy my own investment home.
A house would entail putting 20% down with a conventional Freddie/Fannie home loan through your bank. These types of loans require the applicant to sign personally and then the loan shows up as a debit on your personal credit report and the loan will count towards your personal debt ratio.
The next step is to prep the home for tenants. It’s called hardening the property – adding luxury vinyl flooring instead of carpet, hard surface countertops that don’t stain or get burned, paint the property a neutral color to appeal to the average tenant. All this while trying not to overspend – and knowing that you will not be living in your new investment.
After all this, now you have to advertise the property, show it, evaluate applications and perform background checks. When your new tenant moves in, you are now the property manager and have to respond to maintenance calls and any other tenant questions & concerns.
You may need to file additional tax returns for the property not only for the municipality that the property is in but also for the municipality that you live in. If you have a vacancy for any amount of time you get zero dollars in rent but still have to pay property taxes and insurance. This gives you a negative return for that period of time.
Pros: You make the spread between the mortgage and the rent and receive depreciation on the a 27 year schedule. You calculate your return by dividing the 20% down payment, rehab cost and any other costs against your net proceeds to determine your cash-on-cash return.
How About a Syndication Deal?
OK, how about a Syndication?
First everything above is not your responsibility. You invest $X dollars, You get a preferred rate of return and, if the deal allows, a percentage of the asset, depreciation, and appreciation as the mortgage gets paid down by the tenants and the rents go up with inflation. As an investor, you have no responsibility for the debt as the syndicator/manager signs a no recourse loan. The debt does not show up on any of your personal records. The asset is professionally managed. Your investment is spread amongst hundreds of doors instead of 1 door.
Example: You leverage your $100k and have ownership in a $5M apartment complex.
Cons: As a limited partner you do not have a personal say as to the management of the property. Your risk is limited to the amount you invest. Government policy and market fluctuations affect the tax structure and potential rents.
The question is – do you want all the work, responsibility, control and profit/loss or do you want to leverage your money by investing in a professionally managed property that gives you the returns, depreciation and appreciation without all the responsibility?
Please feel free to schedule some time with us to explore if being a passive investor in the apartment sector is right for you. You can schedule using this Calendly link.
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