Dear valued investors and future investors,
Another week’s gone by and it’s time again for CPI Capital’s weekly news briefing. This contains a mixture of updates, commentary and informative articles about the lucrative world of passive real estate investment.
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An argument which often comes up is whether it is better for those seeking superior investment returns to invest in multi-family and/or BTR-SFR properties or invest in single family homes (“SF” or “SFH”). SFH comprises single unit properties which may have already been built and are available for acquisition, perhaps renovation and rental.
So, this week we’re going to look at this question.
What are single family homes?
A single family home is a free-standing residential building which is designed to be used as a single-dwelling unit, with no shared walls and set its own land.
SFH differs in various ways from build to rent (“BTR”) properties which will have been built specifically to be rented. They are more likely to be individual homes built originally for sale and a portfolio of SFH may be properties not located close to each other, in different neighbourhoods and possibly having different types of tenants.
Clearly, investing in single family properties has some benefits, not least of which are rental income and, hopefully, capital appreciation. In fact, for a number of investors, it’s where they get their start in real estate investment. However, invariably investing in SF is for individual investors with limited capital and bearing the responsibility to find a tenant, rent and subsequently manage the property(ies).
It can take a considerable amount of time and ample liquidity to create a SFH portfolio large enough to cover major expenses or absorb ongoing vacancies.
Passive investments in multi-family or BTR-SFR have certain advantages
Investing in multi-family or BTR-SFR real estate has a number of notable advantages, which include:
Ongoing value creation
The syndicator of a multi-family or BTR-SFR project has more control over the value of the property as this is essentially driven by the property’s net operating income (“NOI”). By increasing a property’s NOI through appropriate capital improvements or enhancing operational performance, capital appreciation can be achieved and steadily maintained over time.
Multi-family or BTR-SFR are a resilient asset classes
Due to a myriad of factors, multi-family BTR-SFR projects tend to have high occupancy rates, even in uncertain times of the economy; even if vacancies rise there will still be cash flow because of their scale. In fact, in economic downturns, many people downsize from luxury homes into more affordable accommodation, uplifting demand for multi-family and BTR-SFR.
With passive syndicated investments, investors share the downpayment with other investors and are only liable for losses (if any) equal to the amount they invested, meaning the financial and legal risks are spread and far fewer. A SFH investor may own 100% of the deal, but is also investing 100%, and bearing the burden of any losses.
Passive investing is much less time consuming than being involved in active SFH investments. There is no need to look for possible deals, seek loans for funding, find tenants or manage the property. Syndicators are responsible for identifying properties, underwriting the project, securing and maintaining any loans, managing the property and meeting investment yield returns and so on.
It is estimated that over 90% of purchases of high-value multi-family or BTR-SFR properties are made through syndications. This allows passive investors to take advantage of the financial strength and experience of a sponsor so that available capital is aggregated amongst other investors and invested in properties offering high and/or preferred returns —and which otherwise might not be available to smaller investors.
Passive investors: do you know how to vet a real estate investment group before making an investment?
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Economies of scale
Enjoying economies of scale can be two-fold: it can apply to both the management of properties but also by helping investors make their investment funds go further.
Larger multi-family or BTR-SFR syndication properties will have sufficient cash flow to engage a property management team who will undertake the necessary day-to-day tasks associated with managing the property. Clearly, the more units under management, the greater the economies of scale, and on-site staff expenses, repair and renovation works and so on are more easily absorbed than if there is only a single property to deal with.
With regard to investment funds, for the same amount as is required for a downpayment in a SFH property, it’s possible to invest in and receive the cashflow generated by hundreds of syndicated units.
Syndications for multi-family and BTR-SFR offer a number of tax strategies which single-family homes can not. Many passive investors don’t pay taxes for the first five years after investment as their dividends are offset by depreciation.
Syndications, typically, use two methods of depreciation to enable a paper loss to be recorded against the majority of an investment in the first year. Investors can also use tax-advantaged self-directed retirement accounts to invest in syndications.
Multi-family and/or BTR-SFR tend to run at high occupancies, over 90%. Therefore, the impact of several tenants leaving is marginal in a large, say, 100-unit property and positive cash flow can still be maintained with a 5-10% vacancy rate. Obviously, once the tenant of a SFH vacates, occupancy is 0%!
Protection of assets
Passive investments in multi-family or BTR-SFR syndications do not require a personal guarantee to acquire, ownership is not easily traceable, and investments are held in entities which offer protection from lawsuits. Conversely, SFH ownership comes with more financial risks and legal exposure.
Passive investors who have limited time and/or real estate experience and who choose to invest in syndications which purchase large apartment or BTR communities gain numerous advantages. These include mitigating risk, protecting assets, tax benefits as well as limiting exposure to inflation and market volatility.
CPI Capital believes there is “no contest” in the decision making for a passive investor between multi-family/BTR and SFH!
CSO, COO, Co-Founder CPI Capital