Elevating Your Real Estate Portfolio: Multifamily Syndications Vs REITs

Stock market and crypto crashes have become commonplace and are only expected to worsen. According to the Federal Reserve Bank in New York, nearly 70% of consumers and 84% of CEOs expect a recession in 2024.

Anticipating a recession often leads to behavior changes even before a market downward occurs. Consumers tend to reduce spending and seek safe havens from the impending storm.

Real estate is one of the most popular safe havens available because tenant leases provide reliable revenue even when stocks struggle. This is particularly true of multifamily investments because renters need a place to stay regardless of what happens in the economy.

If you ask your financial adviser about getting into real estate, they will likely encourage you to invest in a REIT. If you want alternatives outside the stock market, multifamily syndications are popular.

But which is better?

Diversification: Both REITS and real estate syndications diversify your portfolio.

REITs more closely resemble mutual funds, holding hundreds of properties within a managed fund. You can diversify across multiple real estate markets and from stock market holdings. However, REITs tend to move with the stock market, limiting their ability to serve as a hedge against recessionary conditions.

Multifamily syndications do not tend to move with the stock market and diversify your portfolio with physical real estate assets, serving as a better hedge against inflation. However, it takes more to diversify across markets or asset classes because you have more stake in individual properties.

Cost and Transparency: The SEC regulates both REITs and real estate syndications.

As a public fund, REITs follow public filing requirements, providing a certain level of transparency. However, fees are higher and tend to be less transparent. For example, fund managers earn salaries north of $250,000, plus bonuses, which make up the bulk of their compensation. Other fees and regulatory compliance costs significantly reduce profit potential.

As a private fund, multifamily real estate syndications use written contracts to disclose fees, making them more transparent. Private funds also have fewer regulatory costs, which allow sponsors to pass savings to investors.

Size and Control: The largest REITs own between 2 and 4 billion in assets. In comparison, the average apartment building has 111 units and would cost an average of 43 million to acquire.

REITs are substantially larger investment pools, giving individual investors no control over the location or types of properties within the fund.

Syndications allow you to invest in a specific property from a sponsor you trust, giving you more control over the location and types of properties within your portfolio.

Time Horizon and Cash Requirements: Investing in a REIT is like buying a mutual fund. You can buy and sell anytime. Most funds have low minimum investments, making them highly accessible to everyday investors.

Multifamily syndications are a more specialized investment. The sponsor, along with a group of investors, buys properties. You remain an owner until the syndication closes by selling or refinancing the property, most often in five to seven years.

Syndications have more significant minimum investments, typically of $50,000 or more. While McKee Capital Group accepts non-accredited investors, many syndications do not.

Final Thoughts

REITs allow new and inexperienced investors to dip their toes into real estate. It does not require much cash, and you can buy and sell anytime. However, public funds must comply with extensive and expensive SEC regulations and pay fund managers massive salaries. These costs reduce profits. REITs also tend to move with the stock market, reducing its effectiveness as a hedge against recessionary conditions.

Multifamily syndications are a boutique investment. You often build a relationship with the syndicator and select individual properties you believe will perform well during your period of ownership.

You have more control over where you invest, and it remains a passive investment, with the sponsor completing all the work that goes into locating, acquiring, and managing the asset.

If you want to learn more about multifamily real estate syndications, watch our introductory video.

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