Multifamily Syndication vs REIT

The deeper you dive in, the more you realize that real estate almost has no boundaries.  It offers diversity for its investors, starting from multiple different markets to various types of investing, and anyone could find a way to satisfy their needs here and grow their wealth in the most comfortable way that is unique to his or her own goals.

Which brings me to my main point - the benefits of real estate investments are attractive for many, but many also refrain from actually investing their capital to avoid all the landlord hassles, thinking that real estate would take all their time and energy, not knowing that becoming a landlord is definitely not the only way they could generate great cash-flow from a real estate investment.

There are many options for earning a passive income from real estate and in this blog post, I will be focusing on two of the most popular ways of doing so - REITs and Multifamily syndication.  They are often confused, despite the big differences between them.

What is Multifamily Syndication?

Apartment syndication, in general, is a group of investors who pool their money together to purchase a building that they wouldn’t be able to manage alone, in this case - multifamily households. It’s a great opportunity for people who are looking for safe, stable, and most importantly - passive income.

In multifamily syndications, properties are taken care of by the owners of the deal, also known as general partners (GP), who are responsible for collecting all the money and managing the properties daily with all its aspects, including all the hassles of the landlord that you wanted to avoid!

Multifamily properties have always been investors’ favorite place to put their capital since the risks of your investment underperforming is nearly down to 0%. Compared to other properties that are specifically designed for single tenants, where one vacancy is equal to 100% vacancy, in multifamily even 2-3 vacant units won’t be able to damage your income as you are still earning money from other multiple units.

More than 80% of multifamily properties are being purchased through syndication as investors get the opportunity to further diversify their investments and enjoy financial freedom by earning the most out of the properties while putting little to no energy into the management. The profits are divided into two, according to the deal between the investors, most commonly it’s either 80%-20% or 70%-30%. Basically, if the profit of the property is equal to $1 million, general partners keep only $200 000 and the rest ($800,000) goes to limited partners (LP).

That being said, it is clear that by combining the two - multifamily and syndication, you are getting the perfect combination of safe and stable cash-flow of multifamily, as well as strong, passive income of syndication.

What is REIT?

Real Estate Investment Trust, or simply "REIT," has a similar concept of pooling the money from different investors to manage the properties that can’t be managed by one, in this case, huge office buildings or shopping malls. However oppositely from syndications, where you are simply purchasing a chosen property with others, here you are an owner of a small share and have absolutely no control over the properties.

A REIT is a great investment opportunity if you want to be a part of the big projects, but keep in mind that it comes with a lot of risks, such as potential tax consequences that can carry a tax rate of 20%, or the under-performance of your investment that can be caused by constantly changing prices of the shares on the market.

REITs don't allow the owner to take advantage of tax write offs.  REITs offer no flexibility as the owner, and the returns are often dwarfed in comparison to apartment syndications that are run correctly.  In addition, your relationship with the REIT manager is basically non-existent, while you should be a simple phone call away from the manager of your syndication (GP).

Conclusion:

Every investment comes with its risks, but understanding the differences in your investment options are extremely important.  From this writer's perspective, multifamily syndications are a much safer bet than REITs.  Just make sure you find the right partner/manager for your syndication investment.   Best of luck!