Syndication vs DIY
Last year, during the summer I decided to make my own DIY pallet board planter (I’m sure you’ve seen these posted all over the internet). It didn’t turn out as I had initially imagined it but it was still a rewarding experience.
The DIY movement has taken off and has spilled over into investing. Have you ever wondered if it is better to do it yourself when investing in multifamily apartment communities or to invest with a team via syndication? Here are some pros and cons of each choice.
There are many hurdles to overcome to start investing in real estate such as education, capital, finding deals and your own mindset.
One of the greatest benefits of syndication is that it lowers the barrier to entry into one real estate investing’s most stable recession resistant assets, Multifamily apartment communities. Syndications offer you the opportunity to invest actively or passively.
If you are a passive investor all you need is the capital to invest. This amount can be as little as a few hundred dollars if you are investing via a crowd funding platform such as fundrise.
If you are an active investor you are able to partner with other active investors. This allows you to focus on one skill, and share the workload with your teammates. Having fewer responsibilities or needing less capital lowers the barrier to entry.
Diversification. Because you are using smaller amount of your resources whether that be capital or time you are able to invest in more assets. Instead of taking $100,000 and buying one property you can split that into $25-$50,000 investments.
And not only will these be in multiple properties, they will be in higher quality, more stable assets than what you could afford with just a $100,000.
Higher quality assets- Syndications pool funds together from multiple investors. Having this larger pool of funds allows you to acquire larger assets. These larger assets are higher in quality due to economies of scale.
They also reduce risk because income is generated from a greater number of units and expenses are absorbed by a greater number of units.
Enjoy current career. Passive investing is one of the benefits of syndication. There are few real estate investing options that are truly passive. This is one of them.
That means you are able to continue working a job or career you love while your money simultaneously works for you even while you are on vacation. If you don’t enjoy your career, syndication offers a profitable income for active investors who wish to pursue investing full-time.
Shared risk and resources. Syndication shares risk and resources. This is time, capital, and network. Each member on the team adds to the pool of resources. If there is an emergency at the property and additional funds are needed to weather a storm, you can turn to all of your partners for help.
Imagine having to come up with funds all on your own for an unexpected emergency? This could be a nightmare or even result in an undesired sale of your property. There is also a smaller upfront investment from each partner so there is a smaller amount of capital being put at risk.
Higher percentage of the profit. Doing it by yourself allows you to have a higher percentage of the profit. If you are not sharing it with anyone then a 100% of the profit goes to you. This does not guarantee that the profit will be higher as you may be purchasing a smaller asset.
Greater sense of control. If you are doing it yourself than you are in the driver’s seat. You make the call when to buy and when to sell. You decide what contractors and vendors to work with, which lenders to seek financing from.
Because you are in control, you need to have a greater understanding the different requirements for a successful investment. If you don’t have this knowledge already you will gain it through hands on experience.
If you want to maintain these benefits without doing a syndication then joint ventures are an option.
Shared profits. Syndications are partnership based investments so all profits must be split between partners based on a predetermined agreement. This means you only get what may be a small percentage of the overall profit the investment generates.
Potential disagreements between team mates. Anytime multiple people are working together there is a risk of disagreement. Syndications are usually multi-year investments so this leaves plenty of time for disagreements to arise especially if the investment runs into challenging times.
More administrative work. Syndications have to be registered with the SEC or have an exemption filed. This leads to more paperwork, and legal administrative task as all partners may need to be vetted in some way. There is also greater accounting overhead as K1s and tax returns have to be done and financial reporting to each member.
Need to find partners. If you decide to partner up in a syndication, you need to find partners. Depending on if you are an active or passive investor will determine how hard this may be. For active investors it may take more time as you may need to build a list of investors who will be able to invest enough capital to make an acquisition.
Investing by yourself is inherently higher percentage of risk because you are taking on all of the risk by yourself. If you are an experienced investor the overall risk is decreased. If you are inexperienced you are taking on a higher overall risk and a higher percentage of that increased risk.
Higher workload. Doing it yourself does not mean you have to do it by yourself. You can still hire contractors and property managers however you will still be called upon to make many decisions. You will be responsible for acquiring financing and due diligence of acquisitions. If you decide to self-manage then this work load will grow even more. With higher workload also comes a higher time commitment.
Limited capital. Being the only owner or investor limits you to the resources you have available. You are only able to acquire a property that you already have all the funds needed to purchase. This will limit how large or how quickly you can grow. You will also be responsible for providing necessary funds in the event of an unexpected emergency.