When you decide to become a passive investor in real estate, there are many options at your fingertips. One of the most hands-off and best returns options is a commercial real estate syndication. Through a limited partnership, real estate investors can invest passively (no requirement to fix toilets, collect rental income, or deal with tenants!) and reap the rewards of passive income, tax benefits, and appreciation, but there are so many different asset types to choose from!
Even the word syndication (which just means group investment) can produce this feeling of overwhelm until you dive in and really begin to understand how simple it can be. Investing money in anything, including the stock market and real estate, always involves risk and it is best to look at each asset type, the risks associated with that particular investment, and how the passive income is structured. From there, you can decide which is the best decision for you.
In this article, we are going to look at the difference between multifamily real estate syndication deals (a group investment in an apartment complex) and hotel syndication deals (a group investment in a hotel). We will go through what makes each real estate asset type desirable and break them down to help you understand the benefits you can expect from each real estate asset category.
Similarities Between Real Estate Syndications: Multifamily vs Hotels
Commercial real estate syndications pool financial resources and talent from a group of real estate investors (there could be anywhere from a few to multiple hundreds of participants) to purchase a large asset together. There are a large number of passively invested limited partners, plus a group of general partners who make the business decisions and “steer the ship.”
There are beneficial tax advantages for both the limited partners and general partners. One of the tax advantages is accelerated depreciation, and many investors can write off a large part of their passive income almost immediately because of this benefit.
When looking at a hotel real estate syndication deal or considering a multifamily investment, you may see many similarities. You’ll want a strong market that can produce reliable distributions on either type of real estate syndication you choose.
As a limited partner, you likely expect to see money in your bank account within the first couple of months or quarters after you wire in your investment capital. Those are the easy items to check off your list at the very top of your pros and cons chart. However, it’s important to be aware of the differences between multifamily syndications and hotel real estate syndication deals.
Differences Between a Multifamily and Hotel Real Estate Syndication
You may think there have to be many, many differences between multifamily syndications and hotel real estate syndication deals. However, there are only a few.
Don’t let this fool you though! These few differences make each asset-specific real estate syndication containing multifamily assets versus hotel assets very different from one another.
Cash Flowing On Opportunity Cost
The main difference between a hotel and a multifamily real estate syndication is the opportunity cost. With a hotel real estate syndication, you are maximizing your revenue daily because of guest check-ins/check-outs. You can drive revenue and minimize expenses on a daily basis when investing in a hotel real estate deal. With multi-family real estate deals, tenants are signing 12, 18, 24 month-long contracts, meaning your revenue is spread over a longer period of time.
Consistent Patronage Preferred
When people think of hotel real estate, many think, “ugh, how can a hotel be a good real estate investment when no one is going anywhere during Covid?”
However, our hotel deals focus on the business traveler. While business initially slowed in 2020, it picked back up quickly since no business can afford to stay dormant. So, there are many people who still have to travel for work, no matter what the political, economic, or medical status of the world. We specifically target hotels whose numbers are not volatile or highly dependent upon tourism but are much more consistent day to day, week to week, and month to month.
A Different Underwriting Process
There is also a difference between the underwriting processes when investing in hotels and multifamily deals. With a hotel real estate syndication deal, a passive investor may look at the comps, but the average daily room price and the repair value will give you a better idea of whether you are getting a great price on a specific hotel.
Returns Are Structured Differently
You will often see higher passive cash flow with hotel deals than with multifamily real estate syndications. In one of the most recent hotel projects, we saw 12+% cash-on-cash return, while our most recent multifamily project was in the 9-10% range. Cash-on-cash returns are the most significant difference.
New Factors For Tax Benefits
Cost segregation is an excellent benefit for our investors in commercial multifamily real estate syndications. Many have made 95% of their investment back within the first year because of accelerated depreciation.
However, depreciation is a little different with hotels because it is spread out over a more extended time period, and you will not get accelerated or bonus depreciation.
Higher Cap Rates on Hotel Commercial Real Estate
You often see high cap rates going into a hotel real estate syndication. We saw a cap rate of 11% with one project, making the real estate project very expensive. The 11% cap rate is why you see higher cash-on-cash returns with hotels. So having more capital upfront is necessary when investing in hotel real estate syndications.
Two syndication opportunities Goodegg has been exploring have allowed us to look closer at the similarities and differences between investing in apartment complexes and hotels.
A Hotel Investment Opportunity: Goodegg Diversification Fund II
The biggest persuasion toward the hotel industry is the large cash flow. However, there are other benefits as well. The hotels’ owner (General Hotel Corp) is not buying hotels, and instead, is selling them and walking away. They’ve agreed to work with Goodegg as long-term real estate partners, providing us a steady stream of hotel real estate syndication opportunities on already profitable, solid assets. We are not changing management, ownership, or disrupting anything within the hotel or their business model.
By looking backward at the historical profit and loss reports and other filings, we’re able to see how these hotels will most likely perform. The real estate risk profile for hotel assets is generally low and these specifically are in high-demand locations since we’re focused on business travelers and not tourists.
This is a great model for repeat business over the long term because once someone generally travels to a city for work and has a great experience, they’re less likely to explore any other stay options the next time they come into town.
A Multifamily Passive Investment: Waterleaf at Leland
The Waterleaf at Leland project is a newer apartment complex that exhibits a low cap rate. A low cap rate in real estate generally makes a deal less desirable because that indicates lower returns over the long run. However, the ultra-low risk profile is definitely in investors’ favor.
Multifamily properties are generally in high-demand areas and we expect excellently qualified tenants won’t be difficult to find. The cost of this new, in-demand multifamily real estate is higher than what we usually go for, but the low risk and steady returns make it appealing.
A Comparison Between These Asset-Specific Syndications
While the hotel deal above boasts a higher cap rate and the apartment complex reflects a lower cap rate, you might be surprised to find that both real estate deals are projected to have the same overall return in the end. Both real estate investments are most likely looking at 2 times the equity at the end of the deal, depending on the ending cap rate.
The difference is the pace at which our passive investors will see money back with the diversification fund. They will see a higher return with the hotel project sooner than with the Leland project, but the overall return will be very similar.
With these projects, we are looking at two different asset classes, allowing us to diversify into two very different asset types and return profiles while also maintaining a similar overall result.
Deciding On Your Best Real Estate Investing Move
Multifamily real estate syndication deals often have a low-risk profile, tax benefits, and attractive cash flow and appreciation projections. Hotel real estate syndication passive investments typically reflect a higher cap rate, but you are maximizing your revenue daily, thus will likely see a faster cash-on-cash return. Meanwhile, in the apartment real estate syndication example here, you see a lower cap rate, low risk, and a steady return over time.
Here at Goodegg, we thoroughly dissect and examine every angle of each investment property, making sure the deal is in favor of the investor before it’s ever presented as an open option in which you can invest. We do everything we can to filter out the muck so that you only see the best possible deals – the ones most in alignment with your desired lifestyle and level of financial freedom.
Before investing in anything, whether it be the stock market, a fund, real estate syndication, or a rental property, it’s always important to revisit your financial goals and perform thorough due diligence so you can confidently decide which type of real estate investment fits into your plan. Either way, you’re moving your financial life forward!
If you have any questions about becoming an accredited investor or real estate investing, whether or not they revolve around hotel or multifamily syndication investment opportunities, we’d love to hear from you! Contact us.