The Key Differences Between Investing in REITs and Real Estate Syndications
REITs (Real Estate Investment Trusts) have become increasingly popular in the investor community as people look to diversify outside of the stock market into alternative investments. It is easy to confuse REITs with multifamily real estate syndications from the outside perspective. However, several differences exist between REITs and multifamily syndications, including taxation, liquidity, and more. We will get into these differences in this blog.
Part of what can make comparing REITs and private multifamily syndication investments confusing is that REITs come in many forms. They can be publicly traded (like stocks), public non-traded, and private (only available to certain investors and more like “crowdfunded” deals or funds). They all typically provide access to multiple different types of real estate assets, such as office buildings, industrial warehouses, apartments, hotels, and more. For the sake of this article, we will compare publicly traded and non-traded REITs with private passive multifamily real estate syndications.
What is a publicly traded and non-traded REIT?
At a high level, according to Investopedia, a real estate investment trust, or REIT, is a company that owns, operates, or finances income-generating real estate.
Modeled after mutual funds, publicly traded and public non-traded REITs offer investors an opportunity to invest in real estate by collecting and pooling money from investors, then using that money to purchase, rent, or build various real estate assets. Returns are paid out in the form of dividends, and investors can see their share prices grow as the asset gains value. Online platforms such as Fundrise and Yieldstreet make it accessible and simple for almost anyone to invest in real estate. The minimums are typically very low, and you do not have to be accredited (high net worth) to invest.
So, how are these types of REITs different from private multifamily real estate syndications? Here are a few specific differences to take into consideration.
REITs Vs. Multifamily Syndication: Taxation
REITs must pay out 90% of generated income in dividends to shareholders, which means REITs typically do not pay corporate taxes. The taxes become the responsibility of the shareholders and can come in the form of ordinary income (as dividends are taxed), capital gains (similar to stocks), return of capital, or a combination of the three. It is vital that you check the fine print on any investment you are considering to understand how you will be taxed so that you can prepare for the implications.
Passive real estate syndication profits are more straightforward as they are taxed as ordinary income. Syndications, unlike REITs, come with several tax advantages, mainly the ability to offset the passive income you are gaining with what is called passive losses due to depreciation of the asset. The tax benefits of multifamily syndications are even greater for those that qualify for real estate professional status. Learn more about how you can reduce your tax burden by investing syndications and how you can pay zero in taxes as a real estate professional here.
REITs Vs. Multifamily Syndication: Liquidity
The key difference between REITs and private syndications is that publicly and non-publicly traded REITs are more liquid than syndication investments. Note that public non-traded REITs are typically less liquid than publicly-traded REITs because they are not widely available on traditional trading platforms. With publicly-traded REITs, you can buy and sell as often as you’d like, similar to stocks in a brokerage account. With public non traded REITs, although you should expect to have your money tied up for a longer period of time, many do still offer the ability for you to sell back your shares at a discount or for some lower return should you choose to exit the deal before the holding period is up.
When you invest with a private multifamily syndicator, you should expect your money to be tied up for the length of the project, typically 2-7 years. Multifamily syndications do not have the option of pulling money out before the final sale of the property. Investors' money is being used throughout the whole lifecycle of the project, and once you are in the project, you cannot just sell your “share” to another investor to pull your money out. However, with that bigger commitment comes a greater reward in the form of typically higher returns.
REITs Vs. Multifamily Syndication: Relationships
When it comes to investing in REITs, relationships are basically non-existent. As the investor, you read about the REITs track record and, from a distance, decide if you feel comfortable participating in their next deal. It is improbable you will ever even have a conversation with the people on the other end. You will need to rely on the information and do your research on the REITs track record to evaluate the risk and opportunity of each investment.
Multifamily syndications, on the other hand, are highly relationship-based. A good syndicator will take the time to speak with you, get to know your goals, and help answer your specific questions about a particular deal or their strategy. These relationships allow for increased trust, rapport, and communication between active and passive investors. As an investor, it’s equally important to understand who you’re investing with and what property you are investing in.
REITs Vs. Multifamily Syndication: Diversification
With REITs, investors often have the option to add multiple properties and asset types to their portfolios with one investment. Many REITs offer the opportunity to diversify by combining asset types such as office and retail properties in one investment or multiple properties in one deal. While this is beneficial for investors looking to diversify, you likely won’t have deep insights into the details of each property in the portfolio and the business plan for each. It is important to vet each deal and its operator closely, as it is challenging for any one person to be an expert in every area.
Passive multifamily syndications typically focus on a specific property or asset type; As the investor, you generally are being pitched one particular property with a specific business plan. There are times that syndications bundle similar properties together for more of a portfolio investment, but it is less common and should still come with a specific operating plan. Each investment stands alone and is built on longevity and trust that the lead syndicator is an expert in that asset and market. The benefit of this is that as the investor, you can precisely understand how the syndicator plans to make money to generate your returns and understand the market dynamics where the property is located. While the individual deals may not be diverse, passive investors can diversify by investing in deals within different markets or asset classes/sizes.
REITs Vs. Multifamily Syndication: Returns
In comparison to multifamily syndications, REITs tend to have a lower total return on investment. Remember how REITs have to pay out at least 90% of their profits to investors in the form of dividends? That means that they do not have money left over to reinvest in the property like multifamily investments do, and therefore the growth they can achieve is limited. On the flip side, REITs tend to pay out a more regular annual return in the form of a dividend, so investors can get a more steady stream of income. For those that are publicly traded, they may also be considered lower risk by some because of their inherent ability to be traded and therefore higher liquidity.
With many syndications, passive investors can participate in the returns from the property’s increased value over time based on factors like renovations, increased or improved amenities and rents. Syndications tend to be more lucrative for investors focused on equity growth than REITs. If you are investing in a private multifamily syndication that is focused on equity growth, you may receive lower annual returns than a REIT but can typically expect a much higher return at the end of the project once the property is sold and your profits from the sale are distributed. This results in more money in the end vs throughout the life of the project.
Conclusion
The real estate investing market is one of the oldest assets of all time and continues to evolve with more ways than ever to get skin in the game. REITs and multifamily syndications are just two of the countless ways to diversify your investment portfolio. What’s most important is that you take the time to understand what you’re investing in, who you’re investing with, the benefits and drawbacks of an investment, and how the investment aligns with your individual goals.
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