Should You Invest in a REIT or Directly into Real Estate?
As an investor seeking to diversify your portfolio and generate steady income, it’s crucial to understand different investment options. In this article, we will explore Real Estate Investment Trusts (REITs) and passive investments in multifamily real estate. We will discuss what a REIT is, the benefits and drawbacks of investing in REITs, as well as the pros and cons of passive investments in multifamily real estate.
A Real Estate Investment Trust, or REIT, is a company that owns and manages income-generating real estate assets. By investing in a REIT, you become a shareholder and gain exposure to a diversified portfolio of properties, such as residential, commercial, or industrial real estate. REITs offer several advantages, including professional management, diversification, and liquidity through publicly traded shares. They are also required to distribute a significant portion of their taxable income as dividends to shareholders. However, it’s essential to consider the potential drawbacks, such as limited control over property selection and management decisions.
Passive investments in multifamily real estate involve investing in a partnership or syndication structure, where a sponsor or experienced operator manages the investment on your behalf. This approach allows you to benefit from the income and potential appreciation of apartment complexes without the direct responsibilities of property management. Passive investments offer advantages such as access to professional expertise, diversification across multiple properties, and potential tax benefits. However, it’s crucial to be aware of the potential risks, including dependence on the sponsor’s performance and limited control over investment decisions.
Now, let’s compare and contrast the advantages and disadvantages of investing in a REIT versus a multifamily syndication as a passive investor.
Diversification: REITs typically own and manage a portfolio of properties across different sectors and locations, reducing the risk associated with individual properties. Investing directly into multifamily assets, gives the investor the control to diversify their investing strategy across multiple syndication opportunities.
Barrier to Entry: REITs can be invested into with lower amounts of capital than multifamily syndications. Typically, the minimum investment as a passive investor in an apartment complex is $50,000 to $100,000. Additionally, some real estate investing opportunities are only open to qualified accredited investors.
Liquidity: REITs are publicly traded, providing investors with the ability to buy or sell shares on the stock market. Capital invested in multifamily syndications typically is considered untouchable through the duration of the holding period.
Returns: The return on investment for REITs is typically lower than what you would see for passive investments in multifamily real estate. According to the stats, REITs provide on average about 13% annual return per year, while it is not uncommon to see annual average returns of 15-20% or more for passive multifamily investments over the deal lifetime.
Taxes: The tax advantages for multifamily real estate investing are a clear cut winner compared to REITs. The depreciation received as a direct owner in an apartment complex can often offset the passive income earned. Depreciation benefits for investing in a REIT are already factored into the dividend payout. Also, the dividends received from the REIT could be taxes at a higher rate than passive income received from direct investments into real estate.
Both REITs and passive investments in multifamily real estate offer compelling options for newer passive investors. While REITs provide diversification, professional management, liquidity, and potential dividend income, passive investments offer access to multifamily real estate benefits without active involvement, higher potential returns and better tax advantages. Understanding the pros and cons of each option will help you make informed investment decisions aligned with your goals and risk tolerance.