6 Opportunity Cost of Investing in an Apartment Syndication
As an investor, all of your choices have opportunity costs. To make the best decisions for your multifamily investments, it is essential to understand what opportunity cost is and how it can impact your investment. Opportunity cost is the loss of potential gain from choosing one option over another. When you decide, you are giving up the benefits of other alternatives. Every choice you make has an opportunity cost associated with it.
To make the best choices for your multifamily investments, you need to keep the following factors in mind:
1. Predictable cash flow
One of the biggest reasons why people just like yourself invest in apartment syndication it's because of capital preservation and local control. In most cases, you know, like, and trust the individuals who are operating the project. You typically do not have the same relationships with an operator in charge of a significant corporation's operations. No matter how much product you buy, your stock value will not increase. In multifamily syndications, you invest with the knowledge of how the business plan will be executed.
The caveat is that when you invest in a real estate syndication, you are tying up your capital in that asset for a predetermined period. During the hold time, if other opportunities arise, you will not be able to take advantage of them. An opportunity cost may be missing out on a deal that offers more significant returns. So, even though other deals may be presented to you, the decision is yours in the velocity of your capital. Remember that money in the bank is a depreciating asset, and multifamily property investing has historically provided more predictable cash flow.
2. Secured investment
Investing in multifamily properties is one of the most secure types of investment. Real estate itself has created more wealthy families worldwide than any other type of investment historically. All investments come with some level of risk. The key is understanding the risks associated with each opportunity and making an informed decision. Investing in the stock markets provides liquidity for your capital and can offer a high short-term yield.
The downside is that you do not typically have capital preservation, which is a significant risk if you want to create a more predictable way of funding your retirement or increasing your monthly or quarterly cash flow. In that case, investing in multifamily properties Syndication offers good capital preservation and is an excellent way to grow your portfolio, but the opportunity cost is that it lacks liquidity.
Of course, you want to make sure that you are making a wise investment choice on the velocity of your capital. When it comes to investing in multifamily properties, "to each their own." Some investors seek tax advantages, economies of scale, and capital preservation. What we have come to realize is that most investors are focused on returns. Significant other types of investing outside multifamily offer a higher yield, a.k.a. returns with a shorter time horizon.
As you know, with high reward come high risk. When you receive an opportunity to invest in multifamily syndications, the projections are based on historical data and future projections. Most of these data are public information, so feel free to ask your syndicator for data sources. It's essential to have a baseline understanding of the market performance or the ability to interpret the underwriting. You want to ensure that the opportunity is underwritten conservatively.
4. Long-term investment
Often, the best choice is not the one that will provide immediate results but the one that will create long-term value. Many different strategies fall under the real estate investment umbrella. For example, wholesaling, fixing, and flipping single-family rentals and a commercial umbrella that covers apartment complexes, industrial buildings, hospitality, mobile home parks, and a few others. As an investor, you can invest in any asset class under the real estate umbrella. Before choosing one, you must have your investment criteria and strategies mapped out. For some investments or short-term, we tend to focus more on long-term investments, 3 to 7 years to be exact. The reason is that we have to give the property time to increase in value through natural appreciation, improvement to the property that results in forced appreciation, and providing cash flow which increases your Internal Rate Of Return (IRR).
The biggest complaint that I hear from people who are new to investing or fix-and-flippers is that they want immediate results. Unfortunately, in most cases, immediate results take a lot of luck. The good thing is the harder we work, the luckier we become. You are already working hard for your capital to invest. When you choose the passive route, you let your capital work harder for you long-term.
5. Passive investment
A big part of the capital stack in real estate syndications comes from raising capital from Passive Investors. Passive Investors are busy professionals like yourself who love what they do but understand and appreciate the value of investing in apartment syndication. They are often referred to as limited partners.
A Syndicationis an opportunity to pool money with other like-minded people and have a professional, experienced operator go out and purchase, renovate, and operate a property. This strategy opens up opportunities that the average person cannot do alone. Because you're sharing the risk (and reward) with other investors, it becomes more accessible to people who want to get involved in real estate but don't want to go it alone.
The opportunity cost for being a passive real estate investor is that you will not have as much control. But the barriers to entry are lowered, it becomes a more predictable investment, and it can still offer great returns.
The role of the Passive Investor is to provide equity capital for the deal. In return, they receive periodic payments (distributions) from the cash flow generated by the property. These payments are often made quarterly and can last for years, depending on the length of the investment. A passive investor typically has a lower opportunity cost than an active investor since you are not actively managing the property, and your liability is limited to the amount of capital that you have invested.
6. Tax implications
The tax implications of your decisions can also have an impact on your opportunity cost. Be sure to consult with a tax specialist to understand how your choices will affect your taxes. Some people believe that it is their patriotic duty to pay taxes. I believe our roads, schools, and bridges must be funded. I trust that you will agree with that. Your contribution to this funding will be purchasing large apartment complexes that pay significant property taxes yearly.
Additionally, it provides jobs for the community and a basic life necessity of housing. With that said, unless you're obligated to, real estate investment provides you with tax benefits to keep more of your returns. Investing in fixed and flip properties does not tie up your investment capital for an extended period of time, but the interest earned on your invested capital is its tax at the earned income rates. You forgo the benefits of leveraging cost segregation to offset your passive income through passive losses.
When it comes to investing in apartment syndication, there are a few things to consider in terms of opportunity cost. One is that passive investors allow the capital to work harder for them in the long term instead of immediate results, which often takes a lot of luck. Secondly, passive investors are usually busy professionals who love what they do but understand and appreciate the value of investing in apartment syndication. This opens up opportunities that the average person could not do alone. And lastly, because you're sharing the risk (and reward) with other investors, it becomes more accessible to people who want to get involved in real estate but don't want to go it alone. The opportunity cost of being a passive investor is that you will not have as much control. But the barriers to entry in large apartment deals are lowered, it becomes a more predictable investment, and it can still offer great returns.
Download your Operations Manual Here. In the Operations Manual, you will learn how passive investors leverage Syndication to create Passive Income to grow their wealth for their future generation and create the ability to make an impact!
For more information on getting involved in a value-add multifamily syndication deal, please contact me at Hutch@HSquaredCapital.com or Dr. Heath Jones at Heath@HSquaredCapital.com. You can also visit our website at www.HSquaredCapital.com. We’d be happy to answer any of your questions and help get you started on the path to financial success through multifamily investing!