Maybe you realize you want to invest passively in real estate, but you’re not sure which is better for you – to invest in multifamily (through a syndication) or an REIT.
This article helps you understand the difference between passive investment in multifamily versus passive investment in REIT, and aims to help you make an informed decision.
What is REIT?
A Real Estate Investment Trust, or REIT, is a company that has a wide range of revenue-generating properties. It involves a pool of passive shareholders, who receive subsequent dividends on their investment. A REIT can be any registered corporation or association that invests in real estate intending to generate revenue. It treats an investment as buying stock.
What is Multifamily Property Syndication?
A multifamily property refers to a residential property with more than one unit of accommodation, such as apartment buildings, townhouses, duplex properties, and condos. Syndication offers multiple individuals a wonderful passive investment opportunity that can generate substantial revenue over time.
Comparing REIT with Multifamily Property Investment
Now that you have a basic idea of these two types of passive real estate investment that you can venture into, let’s see which one is better for you. There are several factors on which you can weigh the two types of investments against each other.
When it comes to REITs, there is no cap on the minimum or maximum amount that you can invest, which makes it a much more flexible form of passive investment than multifamily properties. But there may be a rule where you can only buy shares in blocks of 10 or 50, and this is predetermined by the company you are buying real estate stocks from. This means that you can start from as low as $1,000.
On the other hand, when you invest in multifamily property, usually there is a minimum investment. For example, some syndications require at least $50,000 as an initial investment. Plus, it may also ask for higher subsequent investments, which is not the case when you invest with REITs. This makes them much more flexible in terms of the minimum investment requirement.
One factor in which multifamily investments take the lead over REITs is the rate of return. With REITs, for the past five years the average annualized REIT return is under 6%, which is better than having it sit in a savings account, but could be better.
On the other hand, most multifamily property investments can bring you excellent yields of 9% and greater. Some properties have even brought wonderful returns of over 15%.
Liquidity refers to the ease with which an asset can be converted to cash, and while real estate investments don’t normally offer too much liquidity, you can actually experience it when you invest in REITs because you can trade them like a standard stock. If you have invested your capital recently but need to withdraw it for an emergency, you can do it quicker than you can with an investment directly in a multifamily property.
In a multifamily property syndication, your investment is locked in with the other investors, at least until the hold period is underway. However, there is a workaround to this problem and you can add it to your partnership or association agreement, which can help you get your capital amount back in a reasonable time.
When it comes to taxes, whether you invest in REITs or a multifamily property syndication, there are depreciation benefits. With REITs, there is no way for you to defer the taxes on the profit that comes from the sale of your stocks.
On the other hand, investing in multifamily properties allows you to defer the taxes if you reinvest in another project by taking advantage of the 1031 exchange.
Diversification of Portfolio
No matter what investment you make, your financial advisors may have always advised you to invest in a diversified portfolio or to “never put all your eggs in one basket”. This is a sound strategy that you can also apply to passive real estate investments.
In REITs, your investment is distributed between an entire portfolio of properties, and their individual financial performance combines to bring you a safe and significant return.
On the contrary, with a multifamily syndication, your investment is tied to one multifamily property, and its financial performance constitutes the amount you get as a return on investment. But you can still diversify by investing with multiple syndicators, which is a viable option.
The risks also need to be assessed when you compare REITs with multifamily syndications. Since REITs are based on the buying and selling of stocks, the value of your investment may fall as the market value of the stocks goes down. This can present a risk.
Multifamily properties are typically a much lower risk, since they give you partial ownership in a physical asset, and the chances of the property value falling drastically are very unlikely.
Ease of Entry
The ease with which you can start investing in REITs or multifamily properties is also a deciding factor for some. As mentioned above, REITs have a smaller minimum investment requirement, and also don’t require any form of accreditation or validation about your financial condition or ability to invest.
However, when it comes to multifamily properties, depending on the route the company that you invest in is taking, they may require you to be accredited. If so, they may ask you to provide an income statement that shows you have an annual income of at least $200,000 to be able to invest in a property.
When you invest in a REIT, you own stocks of the real estate portfolio that you invest in, which is somewhat abstract, and you don’t get your name on any property. This also means that you don’t reap the full benefits of the financial performance of that portfolio.
On the other hand, investing in a single multifamily property allows you to attain ownership of the asset. You have partial ownership of a real property that you can physically see. You can see how the investment progresses as the company you’ve invested with implements their plan to improve profitability. Your profits are tied to tangible things – improvements made, rents increased, occupancy rates, etc., which you can track.
Reachability refers to the ease of access that you have with the people who manage your investment. With REITs, it can be quite difficult for you to reach out to fund managers or investment consultants. Rather, you will be directed to a manager or representative.
This is an area where investing in multifamily properties excels, because you have direct access to the general partner or sponsor you’ve invested with – the person managing your investment. You don’t have to go through some complicated process to speak to a real human, only to find out they can’t really do anything for you. You can pick up the phone and call the general partner / sponsor or send them an email directly.
Both REITs and multifamily syndications allow you to make sound passive investments, and they are generally more attractive than other types of investment. Do a little homework to determine what’s the best fit for you and then invest with a company you trust.
If you’re interested in high returns and great tax benefits, we would love to speak to you about investing passively in one of our upcoming multifamily property syndications. Contact us today to get started!