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REITs vs Multifamily Syndication (Which is Better?)

“If you’re not going to put money in real estate, where else?” — Tamir Sapir

Which is better: REITs or multifamily syndication investing?

REITs are real estate investment trusts.

They’re liquid, meaning you can get in and get out.

They have some real advantages.

There’s also some disadvantages.

How do they compare to multifamily investing?

Aren’t they kind of the same thing?

The answer is no, they are very different.

Today, I’m going to tell you how.

Let’s jump into it!

1. What is a REIT?

There are some specific advantages and disadvantages of REITs.

REIT stands for a real estate investment trust.

These are very large, publicly traded companies.

You can get in and out of them as a publicly traded share on the stock market.

They have a rule where you have to pay 90% or more of the profits out to investors.

Let’s start with the pros:

They offer liquidity.

If you want to sell, you can immediately sell.

It’s no big deal.

Beware, though!

There’s a saying that if you want to have a lot of liquidity, you should just go to a bar…

You’re gonna find a lot more liquidity in a place like that.

REITS also have scale.

If somebody has billions of dollars to invest, there are REITs that will happily take it.

They can actually accommodate all of it because they’re buying the nicest, newest properties in the biggest markets.

Let’s move onto the cons.

These are Class A type properties.

They are typically not that old, most built in the last 10-20 years.

There’s not much opportunity to really add value.

With older properties you are able to find ways to add value.

Another con of REITs is that you own the market.

If the market goes up, these will go up.

If the market goes down, they’ll go down.

When you own REITs, they are generally going to follow what the market does.

Some would say that’s an advantage.

I would say it’s a con.

This is because you want to invest in something that distinguishes you from the market.

The next con is that you can’t identify an underperformer.

If you have hundreds or even thousands of properties in one REIT, how do you know which ones are underperforming?

What do you do about it?

There’s so much in there, it’s really hard to tell!

The last con is the REITs are operator dependent.

They are dependent on who’s operating the REIT and not your own decisions.

That’s the basics on how REITs work – now let’s talk about multifamily!

2. What is Multifamily Syndication?

How is multifamily different from a REIT?

Multifamily syndication is two words.

We’ve got Multi and Family.

This type of investing involves apartment buildings with more than two units.

The ones we do are typically a hundred units or more – so very large!

Besides the building, you have this thing called syndication.

Syndication is when you have a general partner and limited partner split as seen in this chart.

You start by purchasing a property in the name of a company.

Let’s say we raise $5 million from investors, including ourselves.

Then the profits will split between the two parties.

A common split is 70/30 or 80/20.

This means 70% of the profits go to the limited partners and 30% goes to the general partner.

We have this split based on alignment of interest.

The split goes to the general partners, who do the actual work, and the limited partners, who invest.

A pro of this compared to REITs is you generally get higher returns.

There are some good reasons for that.

One is the value add component where you can do renovations on the property.

These are typically properties that are a little older so some of the units might need renovations.

Operators can typically spend $10,000 per unit (could be more or less).

You see some rent upside as you renovate those units.

You can do some common area stuff, maybe you fix the pool.

This increases rents, which really is how multifamily is valued.

Other pros include the tax advantages of multifamily as well as getting actual ownership.

You’re not one of millions of investors that has paper shares.

You’re actually a real owner of this particular asset, which is amazing!

There are some cons of owning multifamily real estate.

One is that it’s not liquid.

It typically can be 2-5 years before your money comes back.

The other con is, just like REITS, multifamily is operator dependent.

The success depends on who’s actually running the project.

So both options really do have pros and cons.

Let’s figure out which one is best!

3. Which is Better?

After all is said and done, which is better:

Multifamily syndication or REITs?

I’m going to go over what we’ve learned for a quick comparison.

Let’s start with REITs.

REITs have too much money.

They go into a market and have billions of dollars.

They have to buy the largest, newest properties in the biggest markets.

There’s less upside because they’re buying in these markets.

They just have to put it in certain areas.

A disadvantage is that they’re not able to do a value add return.

They get the rents that come in for the property, but there’s not a lot more upside when it comes to value you can add.

Having a newer REITs property means you’ll have lower returns.

Some people feel this might be more stable.

I would beg to differ.

Bigger markets are typically places that are hit hard with recessions.

I would say that’s something important to consider.

However, if you do have need for liquidity, you can sell REITs immediately.

You can sell it multiple times during the day.

If you’re looking at short-term investments it could be beneficial.

The challenge is you really own the stock market.

Whatever the stock market is doing, that’s how your REITs are doing.

Now, let’s look at multifamily.

Some of the advantages include higher returns.

Because of the value add component, you get general rents as well as the upside from doing renovations and increasing rent when new folks move in.

There’s some really unique tax advantages.

You can defer a lot of the taxes or not pay taxes on what you’re making.

That’s pretty amazing!

A disadvantage of multifamily syndication is you’re not as liquid as you are in a REIT.

You can’t buy and sell multifamily whenever you want.

Instead, you’re typically in for 2-5 years, sometimes a little longer.

In general, it’s more of a longer-term investment.

If you’re interested in learning about how to use your retirement account to supercharge your retirement account, check out this video.

Albert Einstein is attributed as saying that the strongest force in the unit of is compound interest.

This very smart guy created some pretty amazing things and also said the strongest force in the universe is compound interest.

I hope you get it working for you.

If you get higher returns for a long period of time, you really can have financial freedom.

Now I want to hear from you!

Are you invested in REITs?

Are you invested in multifamily syndication?

Would you invest in one and not invest in the other?

Let us know in the comments down below and let’s have a conversation!

Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.

Bronson Hill

Bronson used to work as a consultant for a medical device company but switched to investing in apartment buildings to make his money work for him. He started with a single rental property that made good money and, after some advice from a family member, moved into bigger real estate projects. Now, he's all about helping others get into this kind of investment to earn money without having to work all the time. When he's not dealing with investments, Bronson loves to travel, write songs, stay active, and help fight modern slavery through his work with Dressember. He believes in working smarter, not harder, and wants to share how that's possible with everyone.

One Comment

  • J.D. Mercado says:

    Hi Bronson, thank you for your interesting article, do you think that multifamily investment funds are similar to REITs, with higher risks?

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