If the concept of real estate investing excites you; however, the hassles of becoming a landlord make you uncomfortable, then passive real estate investing is the right option for you. When it comes to passive real estate investing, two major vehicles drive it: REITs and Multifamily Syndication.

REIT or real estate investment trust is a company that invests in commercial real estate. Investing in a REIT means I’m essentially backing a company that, in turn,  invests in the real estate market. I do not get to directly own any real estate property nor oversee the management systems. In Multifamily Syndication, a group of investors pool money to acquire a multifamily property. Investing in a syndication means I get direct ownership of the real estate property. 

Both REITs and Multifamily Syndications offer passive income from real estate, but differ widely in their structure. In this blog, I will critically analyze all the distinctions and what they mean for investors.

1. Control and Ownership

With multifamily syndication, you retain the control to choose. You can decide to invest solely in syndications that are buying properties in desirable areas, and that strike the right mix between cash flow, appreciation, and risk. 

With REIT investing, you can evaluate the company’s reputation and track record but have no control over the types of properties that the REIT will fund with your money, thus, creating room for unpredictability and ambiguity. 

My Take:

With REIT investments, if the market value of a REIT falls, your returns fall too. However, with syndication, you own equity in the property. Hence, even if the syndication company goes out of business, your equity in the property will stay safe.

2. Potential Returns

In multifamily syndications, sponsors perform due diligence to ensure the profitability of the investment before they can convince the investors to invest with them. With both the sponsor and the investors closely involved in weighing the merits of an investment property, they are selective towards narrowing down on the property with high profitability potential.

REITs are under pressure to invest money from investors across a huge portfolio of properties. If any one sector of real estate underperforms, the profit from other sectors gets diluted.

My Take

With many levels of careful due diligence, multifamily syndications hold the potential for greater returns. 

3. Diversification

Multifamily syndication involves acquiring, managing, and profiting from a single multifamily property. Although you can participate in multiple transactions, each syndication only involves one specific property.

REITs own a diverse portfolio of different property types spread across different geographies, giving investors a chance at diversification, however, with no direct real estate ownership.

My Take

Even though diversification with REITs sounds like an attractive plan, over-diversification comes with risks. If one sector goes down, it affects the entire portfolio and lessens the potential returns from the portfolio’s high-quality investments. With multifamily syndication, your potential returns from one high-performing deal do not get diluted by the economic headwinds affecting other real estate sectors.

4. Tax Benefits

Multifamily syndications bring multiple tax-saving benefits. As a part owner of the multifamily property, investors can reduce their taxable income by writing off the theoretical cost associated with the depreciation of the property. This depreciation loss is only a theoretical loss, that is you appear to be losing money on paper when you are actually making money.

REIT investments involve a share in the company and not the property, thus making investors ineligible for depreciation write-offs. On the contrary, all dividends and payouts are regarded as ordinary income, thus increasing the tax burden. 

My Take

Indisputably, the tax benefits with multifamily syndications far outweigh REIT investments. With multifamily syndications, the investors can greatly reduce their taxable income, while REIT investing adds to their tax burden.

5. Compounding Benefits

In multifamily syndication, instead of following the conventional buy-and-hold formula, investors use compounding strategies to reinvest their returns in acquiring more properties. What makes this strategy more profitable is the 1031 exchange tax benefit that allows offsetting the tax on property gains by investing in another asset, thus allowing for tax-free capital growth.

While compounding strategies can be used in REIT as well, they do not come with tax benefits. The dividends that are reinvested should still be included on the investor’s tax return and the taxes paid. Moreover, if stocks do not perform well, you stand to lose out more than you gain.

My Take

Multifamily compounding strategies outweigh REITs by offering tax-free and exponential capital growth; whereas REITs do not offer any tax breaks, and instead increase the risk during economic downturns.

6. Liquidity and Volatility

If liquidity is important for the investor, then REITs outperform multifamily syndication. However, this liquidity is a two-edged sword, as the ease of buying and selling makes the REIT market prone to price volatility. REITs are exposed to market conditions daily and their stock price varies widely from one month to the next.

With multifamily syndications, you typically invest in a property and then hold it for some time before cashing or refinancing it out, thus making them steady investments with predictable valuations and returns.

My Take

REITs, even though highly liquid, are exposed to wild fluctuations in the stock market, whereas multifamily syndications offer a stable investment, as they are not publicly traded daily.

The Bottom Line

While both REIT and multifamily syndication offer passive income benefits from real estate, the ultimate choice depends heavily on your personal goals and needs. While REIT investments work on the volatile “take-care-of-my-dollar” model, multifamily syndication provides full disclosure on the investment’s business plan, financials, and market fundamentals for you to decide the investment that is the best fit for your investment goals.

If you are ready to have a long-term stable investment that provides recurring growing income, along with multiple tax benefits, then multifamily syndication is the way to go. Feel free to schedule a call to discover how I can help you meet your financial goals through multifamily syndications.