Rental Property or Passive Multifamily: Which Approach Is Right for You?

Sep 21

9 min read

Real estate has long been an attractive way to build wealth and diversify an investment portfolio. But deciding that you want to invest in real estate is only the beginning.

The next question is how you want to own it.

For many investors, the choice comes down to two very different approaches:

Buying and managing rental property yourself
Investing passively in a larger multifamily property

Both can provide access to real estate. Both can potentially generate income, appreciation, and tax advantages. But the experience of owning them can look very different.

The right approach depends on your goals, your available capital, how much control you want, and perhaps most importantly, how involved you want to be.

Owning a Rental Property Yourself

Direct ownership is the approach many people picture when they think about real estate investing.

You purchase a house, condo, duplex, or small apartment property and become the owner and landlord. You choose the property, arrange financing, select tenants and collect rent yourself or hire a property manager, decide what improvements to make, and ultimately decide when to sell to potentially realize the property's appreciation.

For investors who enjoy real estate and want to be closely involved, that control can be a major advantage. You are making all of the decisions.

But you are also responsible for them, both operationally and financially.

Even with a property management company, the owner typically remains involved in larger decisions surrounding repairs, vacancies, leasing, capital improvements, financing, insurance, taxes, and the property's overall financial performance. And when the property needs a new roof, an HVAC system fails, or another unexpected expense arises, the owner is ultimately responsible for making sure the money is available to address it.

For some investors, that is exactly what they want. For others, it can begin to feel less like a passive investment and more like another business to manage.

What Passive Multifamily Investing Looks Like

There are different ways to invest passively in multifamily real estate. One common approach, and the model we use at Jewels & Crown, is a real estate syndication.

In a syndication, a group of investors pools capital to acquire a larger property that would typically be difficult for an individual investor to purchase alone.

The structure generally includes two groups.

General Partners (GPs) make up the operating team. They find and evaluate the property, negotiate the acquisition, arrange financing, conduct due diligence, develop and execute the business plan, oversee property management and renovations, monitor financial performance, communicate with investors, and eventually execute the sale or other exit strategy.

Limited Partners (LPs) are the passive investors. They contribute capital to the investment and participate in its potential financial benefits without taking responsibility for operating the property.

That doesn't mean LPs simply hand over their money and disappear.

Before investing, prospective investors have the opportunity to evaluate the property, its market, and the surrounding neighborhood, review the business plan and financial projections, ask questions, learn about the operating team, review the investment documents, and, when available, tour the property. Once invested, they receive ongoing communication about the property's performance, progress on the business plan, distributions, material developments, and changes that may occur along the way.

The difference is that the investor stays informed without being responsible for the day-to-day execution.

That can be especially meaningful for professionals, business owners, and other busy investors who want real estate in their portfolios but do not necessarily want the responsibilities that come with becoming a landlord.

Control, Experience, and Peace of Mind

One of the biggest differences between the two approaches is control.

With your own rental property, you generally have significant control over the investment. You decide which property to purchase, what financing to use, how much to spend on renovations, how the property is managed, and when to sell.

You also assume responsibility for making those decisions, executing them, and funding the property's needs when additional capital is required.

In a passive multifamily investment, operating decisions are made by the GP team according to the investment's business plan. The passive investor is choosing to invest in the property, business plan, and operating team upfront rather than making each individual operating decision afterward.

That distinction is important.

Passive investing doesn't have to mean being disconnected from your investment. A strong operating team should keep investors informed about how the property is performing, what has been accomplished, what challenges have arisen, and whether anything has changed from the original plan.

What the investor gives up is day-to-day operational control. In exchange, the investor gains access to an experienced team whose job is to execute the business plan, oversee the property, solve problems, and manage the financial and operational demands of the investment.

For some investors, having complete control provides peace of mind.

For others, having an experienced team responsible for the execution provides it.

One Property vs. the Scale of Multifamily

There is also an important difference in scale.

When you purchase a single-family rental, one vacancy means the property is 100% vacant. With a duplex, one vacancy means half of the units are vacant.

A larger apartment community spreads occupancy and operating performance across many units. One vacancy in a 100-unit apartment community represents just 1% of the property's units.

Depending on the size of the property, multifamily communities can also support professional onsite management and maintenance teams, dedicated leasing resources, more sophisticated operating systems, and improvements that may not be practical for an individual rental property.

That scale does not eliminate risk. Apartment communities can experience vacancies, unexpected expenses, changing market conditions, and other challenges just like other real estate investments.

But a larger property generally has more units and more sources of rental income across which to absorb those challenges. A single vacancy, unexpected repair, or nonpaying tenant can have an outsized impact on the economics of a one- or two-unit rental. In a larger apartment community, that impact is spread across a much broader operating base.

How Much Time Do You Want to Spend on

Your Investment?

This may be the most useful question to ask yourself.

Direct real estate ownership can require considerable time, particularly during acquisition, renovation, tenant turnover, or unexpected repairs.

Even investors who hire property managers still need to manage the manager, review financial performance, approve certain expenses, make strategic decisions, ensure the property continues to meet their objectives, and secure financing or provide additional capital when significant unexpected needs arise.

Passive investors have a different role.

Before investing, they should spend time evaluating the opportunity, understanding the business plan, reviewing the risks, asking questions, and conducting due diligence on the operating team. Once invested, however, the GP and its operating partners handle the day-to-day execution.

The investor can stay informed through regular reporting and communication without being responsible for whether a unit needs a new HVAC system on Tuesday morning, how to pay for it, or who is going to install it.

For someone who enjoys being an active real estate owner, that distinction may not matter.

For someone whose time is already committed to a career, business, family, or other priorities, it can matter quite a bit.

The difference becomes even clearer when you consider what each approach requires from you as an investor. The same amount of capital can create two very different ownership experiences.

The Capital Commitment Is Different, Too

Buying a rental property yourself typically requires enough capital for the down payment, closing costs, initial repairs or improvements, and reserves for future expenses.

You may also personally take on a mortgage and, depending on the financing, provide a personal guarantee. And the initial investment is not necessarily the last capital the property will require. Owners need to be prepared for future repairs, improvements, vacancies, insurance increases, and other expenses.

With a passive multifamily investment, investors contribute a predetermined amount of capital toward a larger acquisition alongside other limited partners. The minimum investment varies by opportunity, but this structure can allow an individual investor to participate in a property that would be difficult or impossible to acquire alone.

The tradeoff is liquidity.

Private real estate investments are generally intended to be held for several years, and investors should not assume they can access their capital whenever they choose. At Jewels & Crown, for example, our business plans are typically structured around an approximate five-year hold, although actual timing can vary.

If having complete discretion over when to sell is important to you, direct ownership may offer greater flexibility.

Retirement Funds Can Open Another Path to Real Estate

Another difference to consider is where the capital for your investment comes from.

Passive real estate investments may be eligible to be funded with certain retirement accounts through a self-directed IRA (SDIRA). Depending on your circumstances, funds from an existing IRA or eligible retirement plan, such as a former employer's 401(k), may be transferred or rolled over into a self-directed account that can invest in alternative assets, including private real estate.

This can give investors another way to add real estate exposure to their retirement portfolios without purchasing and managing a property themselves.

Self-directed retirement accounts can also own rental real estate directly, but there are important restrictions. Because the investment is owned by the retirement account, the account holder generally cannot personally perform work on the property or use it for personal benefit. All income and expenses must also flow through the retirement account.

For someone who wants to be a hands-on landlord, those restrictions may make retirement-account ownership less practical. Passive multifamily, on the other hand, naturally separates the investor from the day-to-day operation of the property.

The rules surrounding self-directed retirement accounts and prohibited transactions can be complex, so investors considering this approach should work with a qualified custodian and their own tax and financial advisors.

What About Returns and Tax Benefits?

This is where the comparison becomes less straightforward because neither approach automatically produces better returns or better tax benefits. The outcome depends on the individual property, financing, business plan, ownership structure, and investor.

With a rental property you own directly, the economics belong to you. Rental income, operating expenses, debt payments, capital improvements, and ultimately the proceeds from a sale all flow through your investment. If the property performs well, you benefit from that performance. If it requires additional money, that responsibility is also yours.

Direct owners may be able to deduct qualifying property expenses and depreciation, subject to applicable tax rules.

In a multifamily syndication, the property's income, expenses, depreciation, and gains or losses are allocated among the partners according to the investment structure. Passive investors typically receive a Schedule K-1 reporting their share of the partnership's tax items.

Multifamily investments may also use strategies such as cost segregation and accelerated depreciation, which can create significant depreciation deductions in the earlier years of an investment. Whether an individual investor can use those deductions, and when, depends on that investor's tax situation and applicable passive activity rules.

There is another important distinction for investors using retirement funds. Investments held inside tax-advantaged retirement accounts are treated differently from investments made with taxable dollars, and certain real estate investments held in an IRA may create additional tax considerations.

So rather than asking, “Which one has better tax benefits?” a more useful question may be:

“Which structure gives me the real estate exposure I want in a way that works with my capital, income, tax situation, and financial goals?”

That is a conversation worth having with your CPA or tax advisor before investing.

So, Which Approach Is Right for You?

The answer may have less to do with real estate and more to do with how you want real estate to fit into your life.

Direct rental ownership may help you achieve your financial goals if you:

Want significant control over the property and business plan
Enjoy finding, financing, improving, and operating real estate
Are comfortable managing tenants or overseeing a property manager
Want to make your own decisions about financing and when to sell
Have the time and interest to treat the property like a business
Are comfortable maintaining reserves and providing additional capital when the property needs it

Passive multifamily investing may help you achieve your financial goals if you:

Want real estate exposure without becoming a landlord
Prefer an experienced operating team to manage the property and execute the business plan
Want to remain informed about your investment without making day-to-day operating decisions
Want access to larger apartment communities and the scale they can provide
Have limited time to devote to day-to-day property ownership
Are comfortable giving up operational control in exchange for professional execution
Want the ability to invest eligible retirement funds through a self-directed account
Can commit capital for a multi-year investment period

And for some investors, the answer is both.

Someone may own rental properties directly while also investing passively in multifamily opportunities. The two approaches do not have to be mutually exclusive.

Final Thoughts: Choosing the Approach That

Fits Your Life

There are many ways to build wealth through real estate, and direct ownership has created tremendous value for generations of investors.

Passive multifamily investing simply offers another way to participate.

At Jewels & Crown, we believe investors should understand not only what they are investing in, but also the role they are choosing to play.

We invest our own capital alongside our investors and focus on multifamily opportunities where we believe experienced operations, disciplined underwriting, and thoughtful execution can create long-term value. We also believe in keeping our investors informed throughout the life of the investment so they understand how their property is performing and how the business plan is progressing.

For investors who want real estate in their portfolio without taking on the responsibilities of owning and operating property themselves, passive multifamily investing can provide a compelling alternative.

The goal isn't to find the one “right” way to invest in real estate. It's to find the approach that is right for you.

Ready to Learn More?

If you’ve been thinking about investing in real estate but aren’t sure where to start, or want to explore how multifamily investing can fit into your long-term financial goals:

This article is for educational purposes only and should not be considered legal, tax, financial, or investment advice. Real estate investing involves risk, including the potential loss of principal. Investors should consult their own tax, legal, and accounting professionals regarding their specific situation before investing.