REITs, Real Estate Private Equity and Multifamily Syndication:
Which is the best passive investment to make and why?
I am often asked this question during investor calls. Investors want to start passively investing in real estate; they want the benefits of passive income, tax advantages, and inflation hedging, but, as being busy professionals, their time is limited, and they wish to avoid the headaches of becoming a landlord.
The two options for these clients are investing in a Real Estate Investment Trust, commonly known as REITs, or REPEs, more commonly known as Real Estate Private Equity Syndication or simply, Syndications. Syndications can invest in residential real estate, small multi-family (2-4 units/properties), or commercial real estate (office, retail, industrial, or large multifamily). Invest on Main Street focuses on large multifamily apartments, known as Multifamily Syndications.
So, which option is better and why? From my perspective, these are the major key differences that I think all passive investors should evaluate carefully:
- How does ownership work?
- REITs: Investors don’t own the asset(s); they own shares in the company that owns the assets.
- Syndications: Investors put their capital directly into a property. They will own a percentage of an LLC or units of a Limited Partnership (depending on the legal structure of the REPE) which owns the property. The investors have direct ownership of the property, able to gain all the benefits of this ownership structure. This allows for the tax advantages, such as depreciation (covered more below) which is passed directly to the investors.
- Risk Factors
- REITs: Investment strategy is up to the manager of the REIT; they can choose to make investments at will with no say from the investors. The investor has no equity in the properties, so there is no real asset owned by investor. If the market value falls of the REIT there investment could theoretically drop to zero similar to if you own stocks in a startup company that fails.
- Syndications: With Syndications, like what we offer at Invest on Main Street, the specific investment(s) are presented to investors for their consideration prior to making an investment. In addition to identifying the property(s), the investment’s business plan, strategy, and financials are all spelled out, allowing the investor to conduct a risk assessment and due diligence before investing. Syndications also provides direct physical asset equity, which is a hedge against any value loss. You own real property. If the Private Equity firm folds, you still own your percentage of the real asset you invested in, which can allow you to recover your investment once the asset sells.
Are they Liquid and What are the Capital Requirements?
- REITs: many are publicly traded, and any investor can buy shares in a REIT through a broker at the share’s current price. This means that if funds are needed, they can liquidate holdings with relative ease when markets are open.
- Syndications: Finding Private Equity firms offering Syndications can be more difficult, and for most, investment in them is limited to accredited investors. Only a certain number of investors is required, so you will need to find an investment open for subscription, and there are often minimum investment amounts ranging from $50,000 to $100,000+. Investments are generally longer, 5-10 years, so liquidity is lower for REPEs.
Which one has better Tax Advantages
- REITs: Because investment is in the company and not directly in the property(s), the tax benefits are limited. Depreciation is claimed but factored in before dividends, so not available for the investor, and these dividends are taxed as ordinary income, which can move an investor up to a higher bracket and tax bill.
- Syndications – Income is distributed before depreciation, which allows the investor to reduce their tax burden claiming this deduction, making it a substantial tax benefit. In a typical Multifamily Syndication Invest on Main Street investment, these depreciation benefits are extraordinary. Through the use of rapid depreciation, cost segregation, and bonus depreciation, Invest on Main Street typically passes through a Year 1 depreciation paper loss of between 50-70% of their investment which, for most investors, carries forward to offset the monthly distributions for 5-7 years. Additionally, through the value-add strategy of Invest on Main Street’s Multifamily Syndications, once the renovation business plan is completed, refinances typically return between 50-80% of their initial investment, which is also a non-taxable event.
When combined with monthly distributions, investors can receive a total of 80-100% of their investment back, tax shielded by the third year, allowing for reinvestment for compounding returns, and maintaining their equity ownership and cash flow position in the property.
- REITs– According to Cohen & Steers, over a 15-year period, actively managed REIT investors have realized an annualized return of 10.6%. Note: this return does not come with any additional tax advantages.
- Syndications:– Each project is different for a multi-family REPE. For most investments offered by Invest on Main Street, and though no project has guaranteed returns, after you have factored in the cash flow, refinance proceeds and profits from the sale of the asset, the projected returns are closer to 17-20%. Note: that number does not include the tax advantages or the compounding effect of reinvesting the refinance proceeds described earlier.
- REITs: Will usually hold a portfolio of properties in multiple markets within its defined asset class (apartment buildings, nursing homes, shopping malls, etc.)
- Syndications: Most, such as Invest on Main Street Multifamily Syndications, focus on a single property or portfolio in a single market and have the detailed information needed to make an informed investment decision. However, some Syndications are structure as blind funds. In these they will not identify a specific property but instead raise funds based on the promise that they will identify a certain type of asset(s) within a range of criteria (market, age, class, value-add plan, etc.) In these blind investments, the investors are entirely dependent upon the operator to make the right purchase decisions and carry out the business plan as promised.
As you can see, for many investors, the advantages of investing in Syndications certainly outweigh the drawbacks. We at Invest on Main Street know that Multifamily Syndications give our investors a passive income stream along with the benefits of property ownership. Both Syndications and REITs have their place, and many of our clients invest in both; often, they will park funds in a REIT while searching for the perfect Syndication, maintaining a balance of real investments in their portfolios at all times.
Invest on Main Street’s focus continues to be in Private Equity Multifamily Syndications. We know that our extensive real estate knowledge and experience can provide our clients with lucrative opportunities for multi-family property investments that deliver tax-advantaged passive income returns our investors expect. All without the headaches real estate ownership usually brings.
Schedule a free strategy call with us if you’d like to learn more about Invest on Main Street or our future investment opportunity.
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Patrick Grimes is a design engineer and CEO and Founder of Invest on Main Street, LLC. His real estate holdings include general partner ownership of a multifamily and single-family real estate portfolio valued over $146M, including 1,950+ units across the southeastern United States and Texas.
He has been active in real estate investment since 2007, including purchasing land and distressed assets, renovating them, and stabilizing them for long-term cash flow. To scale his real estate portfolio, Patrick moved from single-family to multifamily investing and founded Invest on Main Street, a private equity firm specializing in multifamily value-add projects in emerging markets.