How Multifamily Syndications Beat Single Family For Accelerating Retirement - Invest on Main Street

How Multifamily Syndications Beat Single Family For Accelerating Retirement

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Investing for retirement is about a portfolio that limits risk, protects your assets, avoids taxes, reduces your exposure to inflation and market volatility and doesn’t take over your life. Yet, when most people think of investing in real estate, they think of buying and flipping single-family homes like they’ve seen on TV shows. What the single-family approach misses are the very factors that help investors safely build their retirement. Not only are single-family homes the riskiest way to grow your retirement, but they’re also time-consuming and slow.

When investing for retirement, multi-family syndications that purchase large apartment communities offer investors an option that saves time, protects assets, limits risk, provides tax benefits, and limits exposure to inflation and market volatility.

What Are Apartment Syndications?

In syndications, a firm pools multiple investors’ funds to make a purchase such as a multifamily apartment complex. Each investor is a part-owner of the property, but they are not responsible for management or maintenance. Syndications are completely passive. Investors receive cash flow created by rents, proceeds from refinances and the sale of the property, while enjoying tax advantages and without legal or financial risk beyond their initial investment.

Multifamily Syndications Save Time

With buying single-family investment properties, it’s up to you to look for deals, go through the frustrating offer process and secure a mortgage. Ongoing management is also your job unless you hire high-priced third-party property managers who are often juggling management of multiple properties, and therefore, pressed for time.

With apartment syndications, all that work is done for you. Syndication firms have relationships with brokers who hand-deliver deals and analysts who underwrite hundreds of them. Syndications are large enough to fund on-site leasing, maintenance and asset management. All you have to do is pick the deal that looks best to you, sign and transfer funds.

Syndication Investors Enjoy The Benefits Of Scale

When you own more properties, the expense of on-site staff, renovation crew and seasonal vacancy losses are easily absorbed, simply because of scale. Buying in bulk also lowers renovation costs.

With single-family homes, it can take decades and significant liquidity to create a portfolio large enough to cover these expenses or absorb vacancies. A single month of vacancy or one major repair can gut a single-family rental’s cash flow for the entire year. But at about the same price as a single-family downpayment, you can invest in hundreds of units with syndications.

Syndications with a value-add strategy buy properties at a discount, improve them, refinance and pay proceeds to investors. This is a common scenario in real estate investment, and it can be done with single-family properties, too. The difference is that, with syndications, it can happen with hundreds of properties at once, again letting investors enjoy the benefits of scale.

Apartment Syndications Hold Strong In Market Downturns

In economic downturns, people downsize from luxury homes and condos into apartment complexes to gain affordable housing. Apartments tend to have high occupancy rates no matter the state of the economy, and even if apartment vacancies increase, cash flow is maintained because of scale.

Inflation Hits Single-Family Investment Properties Harder

Rental income from investment properties is a great way to hedge against inflation because rents increase as inflation rises. While expenses, insurance and taxes also inflate, this is more of an issue with single-family homes, as their profit margins are thinner. Inflation-affected expenses are typically outpaced by the leap in income caused by growing rent checks. Oftentimes, apartment investors enjoy higher profits in an inflationary environment.

Tax Advantages Of Apartment Syndications

Multifamily syndications offer many tax-shielding strategies that single-family homes do not. Syndications often use rapid depreciation and bonus depreciation to pass through a paper loss for the majority of your investment in the first year. Many investors don’t pay taxes for the first five years because their dividends are offset by depreciation.

Investors can use tax-advantaged self-directed retirement accounts to invest in syndications, but to do so with single-family, you may need to pay in cash, as lenders may not provide loans directly to retirement accounts.

What isn’t well known is that 1031 exchanges allow for single-family landlords to trade in their rentals for done-for-you multifamily syndications while deferring capital gains taxes.

Apartment Syndications Protect Your Personal Assets

What makes single-family homes riskier than syndication is the outsized financial and legal exposure. Most investors buy a single-family home in their own name and then personally guarantee the mortgage. This exposes their assets to risk. In the event that you can’t pay your mortgage or there is a lawsuit by your tenant, a search can easily identify your assets, which can be seized or sold in the event of a foreclosure or legal judgment against you.

Investments in syndications do not require a personal guarantee, your ownership is not easily searchable, and your investment is held in entities that shield you from frivolous lawsuits. The very worst case is losing your initial investment. I go into more detail about syndication and asset protection in this article.

Syndication Is Not For Everyone

Of course, no investment is perfect for everyone. If you want the ability to liquidate your investment at a moment’s notice or be involved in the day-to-day management, syndications may not be right for you. With syndications, your initial investment is held until there is a refinance or the property is sold, and as an investor, you don’t have any control over when a property is sold or its daily operations.

Building Your Dream Retirement Starts With Your Decisions Today

However you choose to build the retirement of your dreams, always start with a foundation of knowledge. Do your research, talk to your CPA, and make sure you feel confident in your decision.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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