$75k: a fifth building of my own, or a passive slot in someone else's 180 units

Question

Eleven units across four small buildings, all self managed, all bought under 2021. I have $75k that isn't earmarked and for the first time I'm looking at LP positions instead of another duplex.

The case for another building of my own. I know the market to the street. My last purchase was a 4 unit at $310k where I put $78k down and it clears about $640 a month after everything including a real capex reserve. That's roughly 10% cash on cash and I control the whole thing, I can refinance when I want, sell when I want, raise rents when I want, and the depreciation flows straight to me. Nobody takes a promote out of my exit.

The case for an LP check. The 10% comes with my labor, and I've put maybe 200 hours into those eleven units this year, most of it on one bad tenant and a sewer line. An LP position at 7 to 12% target with a pref and no phone calls is a different product. It also gets me into asset classes and markets I will never buy alone, and it forces me to learn how institutional deals are actually structured, which I want to know before I ever try to syndicate anything myself.

What stops me is that in my own deal the risk is my own competence, and in an LP deal the risk is a stranger's competence plus a five year lockup on money I currently can access in about three weeks with a HELOC. I go back and forth weekly. Where would you put it.

karen_whitfield · Answer

Price the 200 hours before you decide anything else. If a property manager in your market takes 8% of collected rent plus a leasing fee, you can buy most of those hours back on the eleven units you already own and keep the control. That changes the comparison, because then you're comparing a managed 10% cash on cash with full depreciation against a 7 to 12% target with a promote taken out of it and no exit timing.

What the LP position actually buys you is a market you can't reach and an education in waterfalls. Both are worth money. Just don't buy them by telling yourself you're buying free time, because a manager sells that cheaper.

kevin_lombard · Answer

The depreciation point isn't quite as one sided as you have it, cairn. LP positions pass depreciation through on the K-1 too, and syndications on value-add plans often do cost segregation, so year one paper losses can be large. Whether those losses do anything for your particular tax picture depends on your situation and on passive activity rules, which is a question for your CPA rather than this thread. But I wouldn't score that column as a win for the duplex without checking.

diane_kowalski · Answer

Split, and I'd say the LP half is where the actual learning is. You get the PPM, the operating agreement, the quarterly reports, and four years of watching how a sponsor communicates when a business plan slips. That's cheap tuition if you ever want to be the one raising. Just go in with the assumption that the money is gone until they decide it isn't, and keep the HELOC untouched behind it.

$75k: a fifth building of my own, or a passive slot in someone else's 180 units

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