Multifamily Syndication - A Tale of Two Investments
by Christopher Levarek
“It is a far, far better thing that I do, than I have ever done; it is a far, far better rest that I go to than I have ever known.”
- Charles Dickens “A Tale of Two Cities”
I distinctly remember driving 2 hours a day, roundtrip to work in a cubicle in front of a screen for 8 hours, 5 days a week. I was also called on the weekend for outages and on-call hours. This was my career as an IT Engineer.
I then would watch as my 401k, my so-called exit plan, bounced up and down even as I put 10% with every paycheck. I knew there must be more then this.
Today, more then yesterday and each day before, the world is changing. More and more, people choose personal happiness and fulfillment over career. Remote work has grown to near 25-30% of the workforce in 2021 allowing many to achieve levels of time freedom previously unknown.
As this change grows, many look to early exits from corporate careers and are searching for a solution. Real estate investment offers that solution to many but the barrier to entry can be high. The experience needed to get started, the inherent risks involved and the cash required can appear to be overwhelming.
Today, I want show how multifamily syndication can get many there. This concept of investing into apartment complexes with thousands of others to earn monthly and quarterly cashflows allowed my exit of the rat race.
If you are looking for a solution, a runway to better, read on as we will compare both a 401k investment and syndication investment…
Multifamily Syndication
Syndication means “to partner” or “partnership”. In a multifamily syndication, a team of experienced apartment managers enter a partnership with investors to buy an apartment complex. Both then share in the cashflow and profits from the deal.
The benefit to this arrangement is that the investors don’t have to learn everything about buying and managing an apartment complex. They fulfill the role of providing capital to fund the deal.
The benefit to this arrangement for the management team, is they don’t have to provide all the capital for every deal they acquire. This allows the team to acquire and manage more deals, bringing more apartment complex opportunities to all.
These investments are all coordinated and regulated by the Securities Exchange Commission so both parties are protected and rules are maintained.
Let’s compare multifamily syndication to a traditional 401k investment over a 5 year timeline.
Investment into a 401k
Amounted Invested = $25,000
Timeline = 5 years
Average Rate of Return = 7%
Comfort/Famliarity Level = High (Comfortable)
Risk Level = Moderate
$25,000 x 7% x 5 = $8,750 Total Return on Investment
investment into a multifamily syndication
Amounted Invested = $25,000
Timeline = 5 years
Average Rate of Return = 15%
Comfort/Familiarity Level = Low (Unknown)
Risk Level = Low
$25,000 x 15% x 5 = $18,750 Total Return on Investment
Clearly the return on investment in a “average” multifamily syndication investment beats out the return in a typical 401k. Of course there are exceptions but this is the case for the majority of investors.
With the return detailed let’s look at other Pros and Cons of investing into an apartment syndication versus a 401k.
Investment into a multifamily syndication
Pros
Higher Return
Tax Benefits from Passive Losses or Depreciation on the property
Lower risk than stock market fluctuation - “Tesla stock diving due to Elon Musk actions”
Real estate business plan easy to understand - “Renting property creates cashflow”
Cons
Due Diligence required on property and sponsor (management team)
Fairly Illiquid - Not as easy to sell to retrieve capital after investment
Unfamiliar
Investment into a 401k
Pros
Comfortable
Tax deferred
Little action or skill required
Cons
No withdrawal or cashflow without fee or tax
Withdrawal delayed until 58+ and taxed at unfavorable rate ie. A favorable rate requires being less wealthy
Overall return is not simple due to stock fluctuations ie. Portfolio performance does not accurately account for negative returns.
At mercy of company and company executive decisions
Business plan of stock providers not known.
And there you have it, a tale of two investments!
IN FINAL
I personally choose to invest into multifamily syndication as the cons of a 401k simply do not align with my lifestyle or goals. However, there is room for both investments so do not feel you need to give up one or the other. Both can have their place in an investment portfolio.
Yet in this article, I wanted to showcase some of the differences and offer an alternative to the simple automatic 401k investment. If you are interested in learning more on multifamily syndication or would like to see open investment opportunities, I invite you to join our investor club!
Until then, Happy Investing!