Understanding Passive Investing in Multifamily vs Hotel Assets
When you decide to become a passive investor there are many options at your fingertips. One of the most hands-off and best returns options is a commercial real estate syndication. But there are so many different asset types you can 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 any type of real estate always involves risk and it is best to look at each asset type and returns profile and decide which is the best decision for you.
In this article, we are going to look at the difference between an example multifamily syndication deal (a group investment in an apartment complex) and an example hotel syndication deal (a group investment in a hotel). We will go through what makes each asset-type desirable and break them down to help you understand the benefits you can expect from each asset category.
Similarities Between Multifamily Syndications and Hotels
Commercial real estate syndications pool financial resources and talent from a group of 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 income almost immediately because of this benefit.
When looking at a hotel 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 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 syndications.
Differences Between Multifamily and Hotel Syndications
You may think there have to be many, many differences between multifamily syndications and hotel syndications. However, there are only a few.
Don’t let this fool you though! These few differences make real estate syndications containing multifamily assets versus hotel assets very different from one another.
Cashing in on Opportunity Cost
The main difference between hotel and multifamily real estate syndications is the opportunity cost. With a hotel 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 deal. With multi-family 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 hotels, many think, “ugh, how can a hotel be a good 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 syndication deal, you 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 cash-on-cash returns with hotel deals than with multifamily syndications. As an example, we’ve seen as high as 12+% cash-on-cash returns with hotels, while our most recent multifamily project was in the 9-10% range. Cash-on-cash returns are the most significant difference between the two asset types.
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 Hotels
You often see high cap rates going into a hotel real estate syndication. We recently saw a cap rate of 11% with one project, making the project very expensive. The 11% cap rate is why you may see higher cash-on-cash returns with hotels. So having more capital upfront is necessary when investing in hotel syndications.
Two syndication opportunities Redline has been exploring have allowed us to look closer at the similarities and differences between investing in apartment complexes and hotels.
Understanding A Hotel Investment Opportunity
The biggest persuasion toward a hotel real estate syndication is the large cash-on-cash return. However, there are other benefits as well. In one particular example, the prior owner is not buying any new hotel properties, and instead, is selling them and walking away. They’ve agreed to work with Redline Equity as long-term partners, providing us a steady stream of hotel 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 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.
Understanding A Multifamily Investment Opportunity
In this example, we’re looking at a newer apartment complex that exhibits a low cap rate. A low cap rate 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. The apartment complex is in a high-demand area and we expect excellently qualified tenants won’t be difficult to find. The cost of this new, in-demand apartment complex 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 example above boasts a higher cap rate and the apartment complex reflects a lower cap rate, you might be surprised to find they are both projected to have the same overall return in the end. Both deals 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 investors will see money back with the hotel syndication example. They will see a higher return with the hotel project sooner than with the multifamily 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 Syndication Investment Move
Multifamily syndication deals often have a low-risk profile, tax benefits, and attractive cash flow and appreciation projections. Hotel syndications 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 syndication example here, you see a lower cap rate, low risk, and a steady return over time.
Here at Redline Equity we thoroughly dissect and examine every angle of each investment opportunity, 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 a fund, syndication, a single-family home, or the stock market, it’s always important to revisit your financial goals so you can confidently decide which type of investment opportunity fits into your plan. Either way, you’re moving your financial life forward!
If you have any questions about hotel or multifamily syndication investment opportunities, we’d love to hear from you! Contact us.