RETIRE SOONER: WHY MULTIFAMILY SYNDICATIONS BEAT SINGLE-FAMILY HOMES
Investing in real estate is one of the most popular ways to build wealth and retire early. However, deciding which type of real estate to invest in can be challenging. While single-family homes have been the traditional investment vehicle for many real estate investors, multifamily apartment syndications offer significant advantages for those looking to accelerate their retirement. In this article, we'll explore what multifamily apartment syndications are, why they are a superior investment vehicle, and how they can help you achieve your retirement goals.
What is a Multifamily Apartment Syndication?
Multifamily syndication is an investment strategy in which multiple investors pool their capital to acquire and operate a large apartment complex. The property is managed by a professional management team, and the investors share in the profits and risks of the investment. The syndication structure allows investors to participate in real estate investments that would otherwise be out of reach due to the high cost of entry. What makes it particularly appealing is that it is completely passive. Investors obtain rental-generated cash flow, profits from property refinancing and sales, and gain tax benefits, all without facing any legal or financial liability beyond their initial investment.
Syndications Limit Risk and Protect Your Assets
One of the primary benefits of investing in multifamily apartment syndications is the limited risk exposure for individual investors. When investing in a single-family home, if the property sits vacant, the investor is responsible for the entire mortgage payment. In multifamily apartment syndication, the risks are spread across multiple units, reducing the impact of a single vacancy. Additionally, syndications allow investors to take advantage of economies of scale, which can reduce expenses and increase profitability.
The risk is further reduced because investors don’t have to offer a personal guarantee on the loan, so their risk is limited to their investment. This is not the case with a traditional single-family home mortgage. If an investor defaults on a residential mortgage, the bank can come after other personal assets to fully satisfy the debt and other incurred costs.
Finally, investors in syndications are considered “limited partners” in security, which limits their liability. If for example, a tenant sues the apartment complex because they fell down the stairs, the investors are not personally liable for anything related to that suit. This is not the case if an investor owns a single-family home.
Syndications Can Reduce Your Taxes
Multifamily apartment syndications offer several tax advantages over single-family homes. In this section, we will explore how syndications can help investors reduce their tax liability and keep more of their earnings.
Depreciation: One of the most significant tax benefits of investing in multifamily apartment syndications is depreciation. The IRS allows investors to depreciate the value of the property over 27.5 years, which can result in substantial tax savings. For example, if a group of investors purchases an apartment complex for $10 million, they can deduct approximately $363,000 per year for 27.5 years.
Bonus Depreciation: Larger properties like apartment buildings can also benefit from cost segregation studies that result in bonus depreciation. Cost segregation is a process where the building is broken down into smaller components, and each component is assigned a shorter depreciation life. This results in a larger tax deduction in the early years of ownership, which can be especially beneficial for syndication investors who may not own the property for a full 27.5 years.
In 2023, up to 80% of these faster-depreciating items can be deducted in the first year of ownership. This is an enormous write-off, possibly offsetting all or a large part of the initial investment.
Syndications Reduce Your Exposure to Inflation and Market Volatility
Real estate investments are known for their ability to hedge against inflation, and multifamily apartment syndications are no exception. As inflation increases, so do rental rates, which can lead to increased cash flow and appreciation. Additionally, syndications provide stability in uncertain markets. Unlike stocks or other investments that can be volatile, multifamily apartment syndications offer consistent and reliable returns. In a recession, people often downsize from homes and condos into apartment complexes, making them stable cash-flowing assets even when other industries struggle.
Syndications Don't Take Over Your Life
Investing in real estate can be a time-consuming endeavor, especially for those who own and manage multiple single-family homes. Multifamily apartment syndications, on the other hand, are essentially hands-off. The syndication sponsor handles locating the investment, handles all the due diligence associated with closing the property, secures the loan, writes the business plan, and oversees a professional management team. They have the expertise and resources to handle tenant screening, rent collection, maintenance, repairs, and other day-to-day operations of the property. This minimizes the risks associated with managing a property on your own, such as handling late rent payments, tenant disputes, and unexpected maintenance costs. Additionally, it frees up the investors' time and allows them to focus on other areas of their life.
Early Retirement is within Reach
Investing in multifamily apartment syndications is a superior investment vehicle for those looking to accelerate their retirement. Syndications offer limited risk exposure, tax benefits, inflation protection, and reliable returns without taking over your life. With the help of a professional syndicator, investors can participate in large-scale real estate investments that enjoy economies of scale. All of this means more money going towards your early retirement, and steady cash flow while you enjoy the beach or your favorite fishing hole.