Which Makes More Money, Rental Properties Or Real Estate Syndications?

by | May 7, 2021 | Uncategorized | 0 comments

One question that comes up most often is which investment provides a better return? People want to know if investing in rental 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, not to mention manage the property (dealing with tenants, termites, and toilets).  So, in exchange for all that hard work, you’d expect better returns, right?

Here are real examples that will help answer this question.

Real Estate Syndication

First let’s review what a $50,000 real estate syndication deal would look like from a cashflow standpoint, just so we have a comparable reference.

If you 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 you 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 more than $333 each month in order to be worth it overall.

Rental Real Estate

Now, let’s have a look at a rental property.

A great example to work from is a four-plex that cost $240,000 at the time of purchase. Each of the four units rent for between $600 – $700 a month. If you put $50,000 down, mortgage payments will be around $1,350 a month. If you add up taxes and insurance, the monthly obligation comes out to around $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.  Here’s what happens:

December 2020

On a month where all four units were occupied, except one didn’t pay, there were 3 rent payments made 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 you owned the property free and clear, it would be great to pocket $1,375, but you 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 2020, you actually lost money on this rental property.

Almost nothing’s the same month-to-month, and there have to be some good months, right?.  So, we need to examine a few more windows of time to really gain a clear picture.

November 2020

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. There was a loss of $461 that month.

October 2020

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 our mortgage, taxes, and insurance of $1,731 on that property, the cash flow was $235.

September 2020

If we go back one more month to September, we see another month where, thankfully, all tenants paid. In this month there were 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

Your 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.

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 best investment.

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?

There’s no right answer for everyone. As you can see, 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.

Yet, YOU still need to tend to the tenants, termites, and toilets to get that $4.00 of cash flow.

If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you.  However, if your time is limited but you have capital to invest, you might want to consider being a passive investor.

For a no-fuss investment with consistent cashflow, then a real estate syndication might be your best bet.

When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests.

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