Multifamily Syndication vs REITs: What's the Difference?

A lot of people who want to get started in real estate investing don’t know the best way to do it, and sometimes feel a little overwhelmed by the different options. Many of these people understand the benefits of real estate investing, like stable cash flow and that asset prices tend to appreciate over time, and are eager to get started.

Two of the most popular ways that people invest in multifamily real estate are with REITs and with multifamily sponsors.

In this blog we are going to be discussing exactly what each of these real estate investing options are and we will explain the benefits of each. After reading this blog, you should have a much better idea of which option is better for you.

What is a REIT?

“REIT” stands for real estate investment trust. A real estate investment trust is a company that owns, operates, or finances real estate that produces income. REITs pool the funds of many different investors in order to help finance the purchase and operation of the real estate, similar to syndications.

In other words, REITs are entities that take money from many different investors, sometimes millions, and use the money to buy and operate income-producing real estate. Investors can buy shares of REITs on public stock exchanges.

REITs are required to pay a minimum of 90% of taxable income in the form of dividends each year. So, people who buy REITs get to receive dividends for each and every year that they hold the REITs. It is common for REITS to pay dividends that are between 1-5%. The average dividend yield for REITs in America is 2.7%.

REIT companies usually use investor money to buy commercial real estate such as offices, retail centers, warehouses, medical centers, and apartment buildings, etc.

Pros and Cons of REITs

REITS have a number of advantages. For example, because they are publicly traded on stock exchanges, they are highly liquid. This means that you can easily sell any REITS that you own, even at a moment’s notice if you want to. Many real estate investors consider this to be a major advantage because it allows them to capitalize on short-term market conditions.

REITs are also a good way to diversify your portfolio. This is because unlike stocks, REITs contain a wide variety of cash flow generating properties. So, for people who are heavily invested in stocks, commodities, or other assets and who want to diversify their portfolios, REITs are a good option.

Additionally, REITs don’t have to pay a corporate tax. This means that payouts can be higher. Also, the dividends that REITs provide are of course, another benefit.

But, REITs have some disadvantages too. For example, REITs tend to have higher volatility compared to other real estate investing options such as multifamily syndications. Also, returns for REITs aren’t as high as they are for many other real estate investing options either. 2.7% dividends might seem high compared to some assets, but considering that many other real estate investing options offer returns of 5-12 %, some real estate investors feel that REITs do not provide enough cash flow.

Another downside of REITs is that dividends are taxed as income as opposed to capital gains. So, this means that some investors will have to pay more in taxes for REITs compared to other assets like stocks.

What Is Multifamily Syndication?

Multifamily syndication is a form of real estate investing that is similar to REITs in that it involves an entity pooling the money of investors and investing it in real estate on their behalf. However, multifamily syndications typically only invest in multifamily properties, unlike REITs which invest in many different types of commercial property.

Also, multifamily syndications typically are private entities and are not publicly traded. Further, oftentimes, multifamily syndications require investors to be accredited.

There are many advantages of multifamily syndication. The first is that it is one of the most stable and profitable options for real estate investing. This is because people need a place to live regardless of what is happening in the economy. The next is that it is extremely passive – the syndicate handles the property finding, buying, and management. Investors can just sit back and collect their checks.

Even though multifamily syndication is an excellent form of investing, some may argue that there are some drawbacks. For example, because many syndications only allow accredited investors this means that these types of real estate investments are not available to a lot of people and they may have high minimum commitments.

Also, multifamily syndication investments are not as liquid as REIT investments. With a REIT, you can get your money out in a matter of minutes during trading hours by selling your shares. With multifamily syndications, it can take months or years to get your money out, depending on your sponsor's requirements.

Which is Better, REITs or Multifamily Syndications?

It really depends on what your goals are. If your goal is to have the most liquid form of real estate investment, then a REIT would be the better option for you. But if your goal is to obtain the most secure, stable, and profitable real estate investment, then a multifamily syndication would be better for you.

The good news is that you can make money with either one of these real estate investing options. They also both are very low maintenance and will continue to generate passive income for you as long as you hold them.

However, one thing that you should consider, is that most REITs have an abundance of commercial real estate. During the pandemic, as tens of thousands of businesses went bankrupt, commercial real estate such as retail, struggled. It is still in a period of recovery.

Multifamily syndicates on the other hand, primarily invest in multifamily housing such as large apartment complexes. For this reason, the argument could be made that multifamily syndications offer more protection from economic turbulence than other real estate assets.

Ready to Move Forward with Multifamily Syndication?

If you decide that you want to move forward with multifamily syndication, then you must first make sure that you are qualified to invest this way. As mentioned before, many sponsors will require you to be an accredited investor. This generally means that you must make $200,000 for at least two years in a row and have a net worth of at least $1 million, though there are some other inclusions to the definition that can qualify you.

If you are accredited, then you can access larger multifamily syndications. The next step will be to choose a sponsor to work with. When you are selecting a sponsor, you should look for one that has an excellent track record, that is attentive to your needs, that lets you ask any question you want, and that will let you speak with other investors that they have had as a reference.

The good news is that profits from investing with a multifamily sponsor can be significantly higher than they are for REITs. So, if you can find a great multifamily sponsor to work with, it could be a great thing for you. Many people make multiple investments with a sponsor after the first one goes well. From there, you can diversify your portfolio further by investing with two or three different sponsors to maximize your real estate investment strategies.

While wealth is not accumulated overnight and is a “long game”, it is very doable to find success by being consistent, patient, and sticking to your overall investment plans. The right partners are what make all the difference!

Want to Invest with Blue Lake Capital?

If you are interested in learning more about passively investing in multifamily properties, click here to schedule a call with the Blue Lake Capital Team.

About the Author

Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.