This article is part of our guide on passive investing in multifamily via syndication, available here.
Do you want to build wealth in real estate? If so, being a real estate landlord may not be the best way to do it. The landlord’s income is only as good as his tenants’ ability to pay rent on time and keep the rental properties clean. This can be difficult for landlords because there are various reasons why a tenant will stop paying rent or fail to take care of the property they live in.
In this blog post, we will go over why being a landlord might not be the best method to make money from investment properties!
Key Takeaways
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The landlord is responsible for maintaining the rental property, seeking new prospective tenants as needed, dealing with unforeseen tenant issues, and ensuring that every tenant makes their rent payments on time.
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Being a landlord is generally not ideal, and depending on the property, finding new responsible tenants can even be challenging.
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Knowing what type of types of assets to buy and areas to invest in is very important, but managing the entire operation is something that doesn’t happen overnight. Investing alongside experienced partners may be a better option.
What is Landlord Real Estate Investing?
To fully understand why being a landlord is not the best approach to building wealth investing in real property, we need to understand what it means to be a landlord. The term landlord refers to someone who owns an investment property and rents it out to a tenant in exchange for monthly rent payments.
The landlord is responsible for maintaining the rental property, seeking new prospective tenants as needed, dealing with unforeseen tenant issues, and ensuring that every tenant makes their rent payments on time.
Being a Real Estate Landlord
A successful landlord should generate positive cash flow from the investment properties through rental income by keeping their expenses(property taxes, ongoing maintenance, insurance, mortgage payments, and utility bills) lower than the rent they collect. It sounds like an easy way to make money, and although several investors have had great experiences being a landlord, it’s certainly not always how it seems.
Is Being a Landlord Worth it?
Many of us have heard the horror stories of tenants that throw huge house parties and have the whole house trashed. Or about the tenant that manages to live in the rental property for an extended period rent-free. Sometimes tenants can be a nightmare that will have you wishing you never got involved in owning investment properties. But it’s okay; we will discuss an excellent solution later on.
If a landlord fails to find a new tenant or keeps their property in good condition, he will not be able to make money. This can happen for several reasons, such as an economic downturn in the landlord’s area, a landlord not taking care of his rental property properly, or any unexpected problems.
Being a landlord is generally not ideal, and depending on the property, finding new responsible tenants can even be challenging. In addition to this, being a landlord can be very time-consuming. Landlords typically spend about 5-20 hours per week managing their residential properties and sometimes only end up with a small net profit. Furthermore, some landlords lose money, often due to circumstances out of their control.
So if being a landlord isn’t the best way to build wealth investing in properties, then what is? The answer is investing in a real estate syndication.
The Power of Passive Income
In syndication, the investors are typically passive. This means that they do NOT have to do anything except for investing their money and wait for it to grow. These passive partners, known as limited partners, can enjoy the benefits of equity appreciation, rental income, amortization, tax breaks, and all the other amazing things that come with real estate investing without the downside of having to become a landlord.
It’s a lot more enjoyable making money without having to do anything for it, which is a huge reason why investing in syndications makes more sense than trying to self-manage a rental home. Also, with more time on your hands, you’ll be able to make more money in your career or enjoy the extra free time stress-free!
What is a Property Management company?
Property management companies are a necessary part of the syndication process. They’re responsible for finding new potential tenants, running each prospective tenant’s credit score, holding security deposits, paying bills, chasing down unpaid rent, and working with the GPs to raise rents when necessary. A good property manager knows the local laws and rental market well and can be an excellent source of information for the GPs to make final decisions.
Good Read: Doctors Investing In Real Estate
The Use of a Top-Notch Property Management Company
Another advantage of investing in syndication is using a highly skilled property management company. Some highly experienced property management companies (usually the best ones) only work with investors who own apartment complexes or other real estate assets that generate enough cash flow to make it worth their time.
This means that unless you have a few million dollars available to put as a down payment on your next real estate purchase, you’ll never be able to have these highly experienced property managers work for you.
Things That Can Go Wrong With a Bad Property Manager
They likely won’t prioritize managing your property if they choose to work with you. This could lead to more extended vacancies or leave specific property issues unresolved longer than they should. Or maybe they’ll even find other ways to pay themselves on your dime.
An example of this could be the property manager informing you that a prospective tenant plans to move in at the start of any given month. Instead, the prospective tenant moves in sometime earlier in the previous month. The property manager could collect pro-rated rent payment for the early move-in but not tell you about it and keep the money. Another possible way a property manager could take advantage of you is by informing you of an unnecessary repair.
Property Management Loyalty
These unethical acts of robbery aren’t necessarily the result of having a property that doesn’t produce enough cash flow; it could happen on any property. However, when you own a type of rental property that makes a substantial amount of rental income every month (these management companies typically get paid a percentage of the total gross income), the game changes, and the property managers compete to obtain the privilege to manage your high-income-producing multi-unit property.
This is a perfect thing. After all, it reduces the likelihood of the property management company cutting corners or getting caught stealing because it’s in their best interest to keep the property owner happy to ensure they remain the property manager of this incredible cash machine.
The Advantage of Diversification
One of the most common investing tips you’ll hear from successful investors is the use of diversification. The diversification concept is driven by the idea that the risk of your investments is spread out over multiple events, which makes it much more likely to make money.
You can lose on some investments with adequate diversification and collectively still experience a net investment gain. Because there are several apartments to collect rent from, the multiunit property offers greater diversification. This means you have multiple opportunities for collecting rent, making a few bad tenants (inevitable) absorbable.
More Units Equals More Stability
Think about how amazing that is. If 1 or 2 renters fail to pay or vacate for whatever reason, a property with 20 units may still generate 90% of the maximum potential rent. That would mean if rents were $1,000 per unit, you’d still collect $18,000. However, a property with 1 unit (single-family home) would lose 100% of its rent collected if something were to happen. A 2-unit property would be better but still lose 50% of its rent, and so on.
What’s clear from the example above is that the more units a property has, the more insulated it is from bad tenants or vacancy issues because of the diversity that comes with having more units. Also, on a very general level, there are more good tenants than bad ones especially if you properly screen every tenant before signing a lease agreement.
Imagine how insulated a 50-unit property would be from a negative cash flow situation. How about 100 units? Or 200 units? Syndications allow investors that wouldn’t usually be able to invest in such incredibly insulated, borderline invincible assets to do so and reap the fantastic benefits that come with it.
Limited funds or Lack of Experience
Syndications also make it possible for people with limited funds or lack of experience to build wealth with rental properties. For example, you can buy an interest in a 100-unit building that could have a down payment of 2 million dollars for as little as $50,000. This allows almost anyone to become a property owner with minimal funds or experience.
What is a Real Estate Syndication?
A real estate syndication is a way for multiple investors to pool their money together and invest in a property. This is typically done through a private placement memorandum describing the investment opportunity and outlining all relevant information about it. An experienced real estate investment professional will have the knowledge and expertise to help guide the investors through each step of the process and ensure that they make a sound investment. Investing in syndications benefits investors who want to gain wealth from their investments.
What is the Difference Between a General Partner and a Limited Partner?
The operators of the syndicated property (known as General Partners or GPs) hold the liability if something doesn’t go according to the business plan. Limited Partners (or LPs) are passive partners who co-invest alongside the GPs.
The GPs are responsible for locating the real estate investment opportunities, arranging a first mortgage on the property (which maximizes returns for the LPs), placing the LP capital, managing the asset alongside the professional property managers, and adding significant value to the property (usually in the form of renovations) all while distributing positive cash flow to the LPs in exchange for a small piece of the property’s upside. GPs must follow the rules of the U.S.
Securities and Exchange Commission (known as the SEC) to raise the cash required to carry out their business plan. This is why large deals make more sense for GPs to locate and invest their time and energy into.
Why Investing in a Syndications Makes More Sense
Some real estate investors (especially if you’re someone that’s just starting) might only have a small amount of capital to invest. At best, they may be forced to buy only a single-unit property or duplex. Also, it would likely need to be in a lower-income area that attracts lower-quality tenants.
As mentioned above, you would have difficulty finding a property manager who is excited about managing your rental. It could work out well, but there’s a ton of risk on the table, and for an inexperienced property investor, this could quickly become a tenant headache that isn’t worth it. This property investor might have been better off investing their money into syndication.
Knowing what type of types of assets to buy and areas to invest in is very important, but managing the entire operation is something that doesn’t happen overnight. Investing alongside experienced partners can make all the difference. In most cases, General Partners invest in real estate full-time and know the ins and outs of the business.
Frequently Asked Questions About Landlord Real Estate
A landlord is a person who owns a property and rents it out to tenants. The renter pays rent that goes towards the owner’s mortgage payment. Renters have limited monetary responsibilities because they can’t be held responsible for costs such as home maintenance, furnishing, security deposit, utility bills, and capital expenditures.
Yes, a landlord is a real estate investor. But a real estate investor is not necessarily a landlord. A landlord has the responsibility of running a landlord’s business. A real estate investor might be a landlord, or they just flip properties or invest passively.
Real Estate Landlord - Conclusion
If you are looking to build wealth in real estate, other avenues for investing may be better suited. Landlording is an option if you want a steady income with a side of hands-on work or management required on your part- but it’s not the best way to make money from property investments.
As you can see, there are many benefits to investing in syndication. If you’re looking for a way to make money from investment properties, then syndication is the way to go!
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