Build-To-Rent Homes: A Renter’s And Investor’s Guide
February 21, 2024
Real estate investing can be an extremely lucrative business, but navigating the different real estate asset classes and strategies can be daunting, especially for newcomers. In this comprehensive guide, seasoned investor J Scott offers rare insight into the key differences between two common real estate investment types – single-family home flipping versus multifamily property investing through syndications.
J Scott made his fortune by flipping over 30 houses per year, generating millions of dollars from fixing up and reselling single-family residences. However, the workload eventually led to burnout. Seeking an easier path that allowed more scale, J Scott transitioned to acquiring multifamily apartment communities and bringing on investment partners to share in the deals – an approach known as “syndication”.
In an interview that we compiled in our video, J Scott pulls back the curtain on his journey from single-family to multifamily, offering the pros and cons of each real estate investing strategy across factors like profit potential, tax advantages, workload, and stress levels, ease of scaling, and more. He also reveals his recommendation for new investors starting out today:
Let’s dive in and uncover J Scott’s rare insight into single-family versus multifamily real estate investing.
When asked what drove his transition from routinely flipping houses to multifamily apartment investing and syndications, J Scott cites three core factors:
J Scott was flipping between 20 to 30 single-family houses per year – an intense workload that led to high stress and eventual burnout. As J Scott notes, scaling a flip business is hard because “you’re basically focused on doing everything yourself – from finding the deals to renovations to raising capital to disposition.” The redundancy across so many small deals became exhausting over time.
J Scott suspected an economic recession was imminent. He asked himself, “What is the asset class I’d most like to be in to weather that economic downturn the best?” His answer was multifamily housing, which has proven one of the most stable and consistent-returning asset classes through up and down markets.
After 10 years of house flipping, J Scott had accumulated profits to invest. He decided to put the money into multifamily properties while maintaining control through syndications. As he states, “I always like the idea of being able to control my own destiny. “I chose syndication so that I could do deals where I could deploy my own Capital alongside Masters.”
Notably, J Scott also highlights the tax advantages of multifamily investing, which we’ll explore shortly. First, let’s unpack the similarities and differences between flipping houses and multifamily syndications.
When asked how house flipping differs from multifamily syndications, J Scott notes some core similarities around high-level real estate business skills – like managing teams and overseeing day-to-day property operations.
However, the key differences lie in the scope of involvement and ability to focus on your strengths:
As J Scott summarises, “When you’re flipping houses typically you have either a small team where you’re doing a lot of stuff yourself…with multifamily, the big difference is that it’s very much a team sport.”
In essence, while flipping provides valuable experience across all facets of real estate investing, multifamily syndications enable streamlining based on individual strengths. So which strategy offers the most profit potential?
J Scott provides rare insight here as an investor who has actively done both single-family flipping and multifamily syndications. Weighing in, he notes:
“From a purely lucrative standpoint, I think they’re equally lucrative but I think multifamily wins when it comes to the amount of stress and the number of hats you need to wear in order to be successful.”
He elaborates that while flipping offers big short-term paydays on smaller deals, achieving scale is tough and requires redundantly carrying out many moving parts across more deals each year. This caps the profit potential for most flip investors.
Conversely, with just one or two syndicated multifamily deals annually, you can match (or even exceed) the annual profits from 30+ flips in a year. You get to streamline efforts based on what you enjoy and excel at (like raising investor capital or finding/assessing deals).
However, J Scott cautions that each multifamily acquisition requires more upfront effort, money, and time invested versus a typical house flip. Yet by leveraging teams, the workload is more manageable over the long run.
Now let’s examine another area where multifamily syndications shine – through major tax advantages.
Beyond raw profit comparisons, one of the biggest differentiators financially between flipping houses and multifamily syndication deals lies in leveraging tax benefits.
As J Scott explains, house flipping provides little to no tax savings or advantages (unless you qualify for specialized niche programs). However, multifamily offers syndicators tremendous tax incentives.
J Scott provides concrete numbers on the tax savings potential of a typical $20 million multifamily acquisition:
He summarises this concept eloquently:
“I can make almost as much money in deferring taxes and investing the savings as I can from doing the [multifamily syndication] deal itself.”
Clearly, the prolonged tax advantages provided by apartment building investments produce a compounding snowball effect over the years that wallops the negligible tax incentives when flipping houses.
Let’s now move on to comparing how each strategy fares when markets correct or crash.
As J Scott notes, by the time of the interview, indicators were apparent that the real estate market was in a difficult space. So how do flipping versus multifamily syndication strategies compare when markets tank?
In short, crashes crush flippers yet syndicators have key structural advantages that allow confidently weathering storms.
J Scott explains why beautifully:
“In the multifamily space…you have a cash-producing asset, you have a cash-flowing asset. So if I buy a property today for 20 million and tomorrow the market corrects and crashes…that asset’s going to continue to cash flow.”
In other words, unlike a flip where you may end up paying holding costs out-of-pocket, rental income from apartment communities covers the mortgage, taxes, insurance, management expenses, etc.
And while the property value may temporarily sink below purchase price, as long as it self-sustains, syndicators can wait out the downturn. J Scott cites how historically even after crashes, real estate values rise again within 5-10 years (often higher than before).
So essentially, multifamily investors feel comfortable buying before crashes because the assets pay for themselves while appreciation inevitably brings longer-term profits. On the contrary, flippers must time exits perfectly to not get crushed holding sinking assets.
Key Takeaway: Multifamily syndication strategies provide cash-flowing properties and patience to outlast market corrections until the next growth cycle lifts values.
That covers comparing core aspects of flipping houses vs. syndicating multifamily assets. Before concluding, let’s outline J Scott’s advice to new investors starting today.
When asked what he would do if starting from scratch again in today’s market, J Scott lays out a clear game plan:
“Get really, really good at one of three things – finding deals, raising money, or running deals [asset management]. Then find partners who specialize in the other areas.”
In other words, thoroughly master sourcing profitable multifamily opportunities, raising capital from investors, or overseeing day-to-day operations. After dominating in one domain, complement your weaknesses by synching up with experts across the remaining pieces like a puzzle.
J Scott continues, “Go in as a small, elite team with each player focused on what they’re amazing at. That’s what I would do if starting over today.”
It’s sage advice from an investor who has been in those shoes of needing to handle everything solo early on. Ultimately finding good partners fast-tracks success.
Key Takeaway: Laser focus on mastering finding deals, raising capital, or asset management first. Then plug experience gaps by partnering with multifamily pros specialising in the other areas.
J Scott’s rare insight shines a light on reasons to consider moving from flipping houses to multifamily syndications (like burnout, recession resilience, and tax benefits) along with key differences between the investing strategies across critical factors such as workload, stress levels, profit potential, scaling feasibility, and market downturn survivability.
Additionally, J Scott provides wise strategic direction for investors aiming to begin their real estate journey – encouraging newbies to deeply specialize in finding deals, raising money, or running operations before bridging any experience voids by synching up with appropriate partners.
While both single-family flipping and multifamily syndications can prove rewarding, the latter appears better suited for investors prioritizing leverage over sweat, preferring steady cash flows to market timing worries, aiming to maximize tax savings advantages, seeking recession-resilient assets, or wanting to amplify profits by focusing on individual strengths.
Hopefully, this guide has shed valuable light on choosing the ideal real estate strategy for your goals. Thanks again to J Scott for pulling back the curtain on his personal investing evolution while dropping rare knowledge comparing flipping houses versus syndicating multifamily along the way.
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