Investing in real estate is an endeavor as rewarding as other investment vehicles such as stocks or bonds but can involve a lesser degree of management in monitoring your holdings (especially if you’re engaged in apartment syndications). So, what is the best way to generate income from real estate?
In this article, we will focus on rentals. Specifically, we’ll identify which type of real estate investment you might find better: Apartment Syndications or Single-Family Rentals.
First, let’s define these two. Apartment Syndications are, simply put, the pooling of money from numerous investors to buy an apartment complex which will then be fixed up, if needed, and rented out. This is a partnership where a manager handles the transactions of the rental property while you, along with other investors fund the endeavor.
Single-Family Rentals (SFRs) are self-explanatory—you buy single-family homes, fix them up for a cost if necessary and then rent them out.
Now, let’s differentiate between the two in terms of cost. Naturally, single-family homes are typically cheaper as a whole than multi-family apartments; although apartment complexes often come out cheaper on a per-unit or “door” basis. So, if you’re simply looking at a $100,000 single-family home compared to a $1,000,000 apartment complex, the difference in the cost would be staggering. However, we’re talking about apartment syndication here, which means that the cost to acquire an apartment complex is divided among the investors, so, you won’t have to worry about shelling out as big of an amount.
Apart from acquisition costs, you also have to deal with repair costs. When buying any property, repair costs are usually incurred. You want the place to be in pristine condition so that you can rent it out sooner and at a good price.
For both single-family rentals and apartment syndications, repair costs would naturally depend on the condition of the property when you bought it. The only difference between the two is how much of the cost you shoulder. With SFRs, you don’t have anyone to share the burden with, compared to joining apartment syndications, where the General Partner (GP) takes care of the arrangement, and you typically just pay a fraction of the cost.
Another thing you have to consider is maintenance expenses. In a typical lease agreement, renters do not shell out money for maintenance and upkeep, so these costs would all have to be shouldered by the lessor.
If you’re managing one or multiple single-family rentals by yourself, you have to pay for the costs out of pocket. Logistics would also have to be considered if you have to visit multiple properties all at the same time, just for maintenance. In apartment syndications, the partnership may bring in or hire a third-party property manager, who’ll take care of the maintenance, the cost of which will be spread among all investors.
Vacancies are where you have real leverage when it comes to apartment syndications. Suppose you only manage one single-family rental. What happens when that becomes vacant? Your cash flow will come to a halt until another tenant occupies it. In contrast, when a single unit in a multi-unit apartment rental is vacated, the partnership’s cash flow, including yours, will not be as affected since the other units are still generating income.
Economies of scale are something that we hear often when it comes to production. You exploit the inverse relation of increasing output versus the cost to produce said goods. But what does this mean in the real estate context?
Expenses and maintenance costs in apartment syndications are typically far less, compared to managing a portfolio of separate, single-family homes because in syndications all units are, quite literally, under one roof. As the number of rental units increases, net income is also increased as you reduce your cost, making it more cost-effective than managing a portfolio of single-family rentals.
Is Rental Still in Demand?
Now that we’ve discussed a few key points regarding real estate investing—rentals, in particular, let’s take a look at the demand for rentals. While some events or instances might influence families to move outside of the city and to the suburbs, potentially choosing to buy a property instead of renting, the demand for units located in key metropolitan areas will still be there.
Each city, district, and state have factors affecting the rental market, such as median household income, that may or may not hurt rental demand. A higher per capita household income may mean that more people in a certain area are able to buy homes instead of renting. However, it’s still more probable that a larger percentage may not be able to afford one and will continue to rent.
There are also commercial establishments that, due to the nature of their businesses, cannot afford to have their employees work from home. This is one thing that can contribute to steady demand in rental properties, especially in apartment complexes in key locations.
We’ve also seen instances where baby boomers who are approaching retirement, opt to let go of their large family home, and just choose to rent. Young families on the other hand, continue to rent as they save up enough cash to buy their first homes in the future. In both instances, the logical choice would be to choose a place that’s either near where they work or is in the vicinity of establishments they frequent.
Investing in apartment syndications certainly has its merits. People who have opted to invest in multifamily will tell you that it’s a worthwhile and relatively safe investment. We are Iron Knight Capital, and we have been successfully providing our clients with professional guidance in the world of apartment syndications. If you would like to know more, schedule a call with us. We’d be more than happy to discuss details with you. We have a team of experts who can walk you through each step of the process in order to make this investment opportunity as easy as possible.