In this post, I’ll show you the best real estate investment that you can do, and dive deep into why it’s the best.

In this method, you’ll actually enjoy true passive income, and generally enjoy higher returns than just single family rental homes.

Disclaimer: Since real estate investment inherently carries a lot of risk, it’s possible you could lose all your money as well. We’ll get back into the “risk” portion at the end of the article.

What’s The Best Type Of Real Estate Investment?

If you buy a single family rental (SFRs) you might get some returns but they’ll generally cause a lot of headaches. SFRs are not passive at all, because Murphy’s Law reigns true. Something will break eventually and will cost you money. A great tenant that’s been paying for 2 years straight could suddenly stop paying rent. A perfectly good house can suddenly have a gas leak that costs you $10K to fix. As long as there are potential problems that may come true, they’ll eventually come true. Hence, SFRs aren’t passive at all. And in fact, SFRs are one of the most active real estate investments you could make even if you have a property manager (since you’ll need to “manage the manager” in most cases).

The best real estate investment product in my opinion are syndications. Syndications are just when a group of people get together and purchase a big real estate project together. This could be a large commercial building, a giant apartment complex. Syndications can also just be a pool of money where they raise $100 million and have a projected plan to buy a few projects.

Let’s dive deeper onto requirements in joining syndications and why they’re a great real estate investment vehicle (when compared to SFRs).

How Do I Invest In A Syndication?

In general, to invest in a syndication you need to be an accredited investor. The requirements to be an accredited investor are as follows:

• You earn more than $200,000 ($300,000 for joint income) per year for the last 2 years, and you expect to earn the same or higher in this year.
• You, as an individual, or with a spouse, have a net worth exceeding $1 million.

What if you’re not a syndicated investor? Can you still invest in syndications?

Absolutely! That’s actually how I’ve invested in syndications.

While a lot of syndications only accept accredited investors, there are syndications out there that allow for a certain amount of non-accredited investors. As an example, the syndication I invested in had a minimum amount of $100,000 and required accredited investors. But after chatting with the folks at a conference, I found out that they do have quite a few slots for non-accredited investors and I can invest $50,000 instead of $100,000.

This is great, because $50K is a ton of money for me already!

So if you’re an accredited investor, you’re pretty much set to invest in syndications. If you’re not an accredited investor, go ahead and chat up real estate syndications until you find one that allows for non-accredited investors.

It’s worth it. Trust me. Read the rest of the article to find out why I think syndications are the best real estate investment class.

Syndications Give Economies Of Scale

Let’s say a syndication bought a 150-unit apartment building, the project will enjoy an economy of scale.

For instance, if you have an SFR and your roof is destroyed, you’re going to need to fork up 5-figures to be able to fix up your roof…for one paying tenant.

Since roofs are generally shared in large apartment complexes, you might pay more for a roof that covers 8 tenants, but it won’t cost 8 times more. This means that for a lot of capex, you’ll enjoy a proportionally higher rate of return when you have to actually fix stuff.

Another reason why syndications enjoy economies of scale is simply the amount of units it’ll have. For an SFR, if you’re “unlucky” with that unit, your portfolio could be in ruins. A bad SFR that’s a significant portion of your net worth means you might be financially screwed. Conversely, in a 150-unit apartment complex, one “unlucky unit” is just a drop in the bucket. In other words, a syndication has the law of large numbers working for it, and the cash flow for the apartment complex as a whole won’t be nearly as volatile as an SFR.

In a syndication, you would only lose a lot of money if all of your units don’t do well as a whole. While this is certainly possible, it’s less likely that the entire complex is a landmine when compared to picking a single SFR.

Professional Property Management Is A Huge Reason Why Syndications Are One Of The Best Real Estate Investments Out there

Property management is a huge lever on your vacancy and how much returns you’ll actually get from your investment. My SFRs had nightmare stories of terrible management.

1. At the beginning, I used my realtor I used to buy the deal with as a property manager. He’s extremely bad at screening tenants. The tenants wouldn’t pay on time. And when the tenants did pay on time, he would take a whole month to mail me the check. Any time I asked clarifying questions on when I would receive the check, he would get mad at me. He had a huge ego problem and if you’re going to invest in the Tennessee area (I would advise you not to), avoid Terrance Hill at all costs.
2. Then I hired Crestcore to manage my property. The reason why I did this is because they were managing another property of mine quite well. Unfortunately, they wanted to be cheap and outsource all their Tennessee staff to minimum-wage Filipino virtual assistants that take weeks and weeks to respond to emails. I needed to evict a tenant and Crestcore told me over the phone that they’d evict them…but they didn’t. I kept following up only to have their crappy team tell me “I don’t want to evict them because I feel bad about it.” Nobody’s feeling bad about me hemorrhaging money so deadbeats can live for free though. Anyway, I fired them since it was very unprofessional. Never go with Crestcore either.
3. Then I got a referral to go with Meridian. They were OK but they had fairly bad attitude. For example, they’d call me up to deliver really bad news, but their attitude was “Hey I don’t mean to bother you while you’re doing nothing and we’re doing all the work for you, but I have some bad news.” Their view of their customers are like these rich folks that are just enslaving them and this was how they delivered the news of the gas leak to me – by attacking me first before telling me I’m about to lose a shit ton of money. Anyway, they were pretty terrible. I finally wanted to sell the house and they did a $11K rehab on the property – but the thing was they only got it “rent-ready” and not “sell-ready.” In short, they had no idea what they were doing, or the realtor I used to sell my property scammed me. I wouldn’t recommend either Meridian or the realtor I used to sell my property.

All this to say, an SFR generally attracts the lowest common denominator of businesses. That is, shitty property management that just wants to take your money. After all, there’s a conflict of interest: they make more money off you if you’re vacant.

In syndications, they will either train their own staff or hire a professional staff that specializes in apartment complexes. Syndications training staff is a great thing because if they have decades of experience with a great track record, you can be confident that they’ll produce a good property management (PM) team for you. Likewise, their experience generally ensures that they’ll hire good PMs as well.

Better PMs = happier tenants = more profits.

Property management also enjoys economies of scale as well. For a very terrible service, SFR property management charges between 8-10%. For well-trained professionals, they’ll take care of the entire apartment for 1-5%.

Caveat: You’ll need to do due diligence and make sure payroll for property management is sufficient. Poorly paid PMs won’t do a good job. I’ll refer you to a book at the end of the post for you to learn much more about this.

Syndications Give Forced Appreciation

A syndicator with a huge team and tons of investor money = they have connections. Connections mean cheaper labor costs. This means less expenses and more profits.

In addition, a syndicator knows how to add value to a property so it can drive up the rental income and net operating income (NOI) of the property. Because a market trades on a cap rate, increasing NOI is generally one of the biggest levers in increasing the value of the property. Massively.

This means after the first few years where rent stabilizes, you’ll not only enjoy cash flow coming in, you’ll also be well-positioned for a very lucrative exit.

Overall, You’ll Enjoy A 100% Passive Investment With Better Returns Than SFRs, Which Makes Syndications One Of The Best Real Estate Investments Out There

In SFRs, you deal with headaches. In syndications, the syndicator deals with the headaches (that’s why you pay them).

But even after fees, you’ll generally earn more because:

• Professional management = less vacancy = higher NOI
• PM’s fees are less than SFRs proportionally so you’re enjoying another ~5% returns for free on top of the increased NOI.
• If the project goes well and the NOI increases, say $100K, on a market that’s trading at a 4% cap rate, the apartment complex is now worth $2.5 million more than what it was worth during purchase time (assuming NOI is held constant)!

In short, I love syndications because they’re less work and they generally earn more than SFRs.

“Best Real Estate Investment Asset Class” Too Good To Be True? A Word Of Caution!

This post has mostly been optimistic. I talk about all the great things about syndications but I haven’t seriously outlined the risks yet.

I say you’ll generally earn more money but you are definitely not guaranteed to earn more money than SFRs or just tossing your cash in the stock market. I say “generally” because the fundamentals of economies of scale and a better team normally translates to more profits.

However, there’s real risks involved here.

One of the biggest risks is poor underwriting. If the PDF or Powerpoint they send you has all the wrong numbers, it won’t matter what the numbers say: you can still lose a lot of money. Poor underwriting means that their team has no idea what they’re doing and they could lose all your money. Thus, it is extremely important that you pick an excellent syndicator. Most of your work as an investor in syndications is double-checking the math and making sure that the syndicator is on point.

You can shortcut these with references, but like the Meridian PM example above, references can often mislead you.

Would you rather be lazy and skip doing a couple hours of math, or would you rather lose $50K of your cold hard cash?

Another big risk is lack of location diversification. While the number of apartment units can help diversify against “an unlucky unit,” all the apartment units are in one location. This means you’re protected against unlucky units, but you aren’t protected against a bad market. Thus, you’ll have to do due diligence to make sure the market you’re investing in will continue to grow and won’t grow stagnant.

The last risk is of course you can lose all the money you put in. In most (but not all) syndications, you cannot lose more money than you put in. But you’ll want to double-check in the contract you sign with them to make sure this is true. In this respect, syndications provide much better protection than SFRs where you can lose much more than what you put in.

As investors, we’re very optimistic. We like looking at a Powerpoint’s projected numbers without thinking seriously about whether or not the syndication’s a charlatan or not. We’re very good at imagining the best possible outcomes. Too good, in fact.

What we’re terrible at is understanding all the numbers and internalizing the worst-case scenario. If you lost all your invested capital, would you be able to survive? If 10 years later, the projected return was only 10% of what they promised, will that severely impact your net worth? These are all question you need to be thinking about when looking to plop down a major investment.

But how do you understand the math? While people can lie about the math in PDFs and Powerpoints, they can’t lie about their competency. If they underwrite the syndicated project poorly, you know they suck and you should move on. If they underwrite the syndicated project properly, you’ll have to double-check everything to make sure they’re not lying about anything.

One of the best ways to make sure your real estate investment with syndications are good would be to learn the math. And one of the best resources out there for syndication math is broken down into very simple terms by Brian Burke’s Hands Off Investor.

If you truly understand the math, then you’ll be ready to take advantage of this truly passive real estate investment class.

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