Choosing Between Real Estate Investment Trust vs Multifamily Syndication

Nov 01, 2023

There is an increasing number of investors plowing their money into multifamily properties. According to data, in 2021 alone, there were 473,000 multifamily homes started, with each unit having an average size of 1,046 sq. ft.

For multifamily investors, you can get into the multifamily investment market in various ways. Two of the most common ones are through a real estate investment trust or a multifamily syndication.

While both are excellent investment paths into multifamily real estate, you must consider several things when choosing between a REIT and multifamily syndication, such as liquidity and tax benefits.

Here’s all you need to know about REIT vs. multifamily syndication and how to choose the best one.

What is a REIT?

A real estate investment trust is an entity that owns, operates, and arranges financing for income-producing real estate. Therefore, a REIT is formed by investors pooling capital to make real estate investments.

By operating in a REIT, investors get benefits such as regularly distributed dividends and inherently low risks.

Most REITs focus on a specific real estate sector with several income-generating assets. REITs can cover various asset classes, such as healthcare facilities, multifamily communities, office buildings, hotels, retail centers, and self-storage facilities, among others.

Investors can join specialty real estate investment trusts focusing on unique assets such as pipelines, infrastructure, cell towers, and energy conduits.

The Different Types of Real Estate Investment Trusts

There are three main types of real estate investment trusts. These are mortgage, equity, and hybrid REITs.

Mortgage REITs

A mortgage real estate investment trust focuses primarily on lending money for investments to commercial real estate investors. These funds are offered with interest-driving returns.

Equity REITs

Equity REITs hold and sometimes operate income-generating real estate. Rental income often forms the primary basis for returns. Equity REITs are the most common type of real estate investment trusts.

Hybrid REITs

Hybrid real estate investment trusts combine the operations of mortgage and equity REITs. Therefore, they offer both sources of investor returns.

The Advantages and Disadvantages of a Real Estate Investment Trust

Using a real estate investment trust as your multifamily investment vehicle can have several advantages and disadvantages. They include the following:

Advantages of REITs

These are some of the top advantages of real estate investment trusts.

  • High liquidity: Real estate investment trusts are often publicly traded on stock exchanges. This makes them highly liquid since you can easily sell any REIT shares you own whenever you wish to. This allows investors to capitalize on short-term market conditions.
  • Tax benefits: REITs often don’t pay corporate tax. Therefore, the payouts tend to be higher.
  • Portfolio diversification: REITs provide an excellent way to diversify your real estate investment portfolio. Unlike stocks, REITs provide a wide range of cash-generating options, making them attractive to investors with a healthy portfolio in commodities, stocks, and other assets.
  • Hands-off passive investment: A REIT often takes care of the management of real estate properties under its portfolio. Therefore, you operate your investments hands-off while still earning from the rental income generated.

Disadvantages of REITs

Here are some of the top disadvantages of real estate investment trusts.

  • Blind investment: Most REITs are blind investments since you don’t know who’s executing the business plan and the deals you’re buying into. Often, communication from the trust only comes in the form of a statement.
  • You don’t actually own a part of an asset: REITs offer shares in the company and not a portion of their owned assets.
  • High volatility: REITs are often volatile compared to other real estate investment options, such as multifamily syndications.
  • Low returns: Compared to other real estate investing options, the returns for real estate investment trusts are not as high. The profits are often subject to more tax burdens since the IRS sees the dividends as income instead of capital gains. This can negatively impact your total returns.

What is Multifamily Syndication?

Multifamily syndication is a temporary alliance of investors who’ve pooled money together to purchase multifamily property. Often, the investors won’t be able to acquire such a portfolio individually.

Often, investors in multifamily syndication will purchase a single multifamily property through a sponsor responsible for locating the deal, financing, coordinating the transaction, and managing the investment.

The investors in the multifamily syndication will provide most of the capital needed for the deal in exchange for equity in the real estate. This is a popular option for passive investors who want a sponsor to take care of everything else with the investment.

The Advantages and Disadvantages of a Multifamily Syndication

There are several multifamily syndication advantages and disadvantages you should be aware of. They include the following:

Advantages of Multifamily Syndications

  • Choice of investors and assets: Unlike REITs, which are blind investments, investors in multifamily syndication get to choose the people and specific assets they want to invest in.

  • Hands-off passive investments: With a sponsor, multifamily syndications can be hands-off passive investments, with the sponsor taking care of property management.

  • Direct feedback: Investors in multifamily syndication get quarterly or monthly feedback from the general partners to know how their assets are performing. The general partners may even host Zoom calls or Q&A sessions to address investor concerns.

  • Excellent tax advantages: In multifamily syndication, you’re an actual property owner, meaning you get the tax benefits of bonus depreciation, improving your total returns.

Disadvantages of Multifamily Syndications

Multifamily syndications have a few key disadvantages:

  • You’re invested in only one asset: Multifamily syndications are often not as diverse as REITs. They’re often only invested in multifamily properties.
  • High initial investment: Unlike REITs, where you can get in with minimal initial investment as long as you can acquire shares, multifamily syndications often require a higher initial investment of about $50,000.
  • Highly illiquid: Most multifamily syndications have an underwritten 5-year hold. This means liquidity can be very difficult until the investment matures.

Should You Choose a REIT or Multifamily Syndication?

Choosing between a REIT or multifamily syndication will depend on your short-term and long-term plans.

A REIT is the better choice if you want highly liquid multifamily real estate investments. However, if you want to obtain actual property with high stability, security, and profitability, most likely in the long term, then a multifamily syndication is the better option for you.

Regardless, you can still invest in both and make decent returns since they’re low maintenance and excellent passive income generators for as long as you hold them.

The primary difference you should note is that REITs have a very expanded portfolio, primarily covering commercial real estate. This sector is highly volatile and easily affected by business and market conditions.

On the other hand, multifamily syndications primarily invest in multifamily homes, which are more stable in the face of economic turbulence.

Make the Right Multifamily Investment Choices

Investing in multifamily properties is an excellent way of generating useful passive income. However, depending on your short-term and long-term goals, you can invest through a REIT or multifamily syndication or take the investment road solo.

Talk to a multifamily investment expert and learn which option is best for you.

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