Multifamily REITs: What You Need to Know

Investors looking to add passive income and real estate exposure to their portfolios may find real estate investment trusts (REITs) to be an attractive option. Multifamily REITs, in particular, can offer unique benefits. However, before investing in them, it is important to have a thorough understanding of what they entail. As an alternative to REITs, Life Bridge Capital provides investment partners with the opportunity to invest in multifamily rental properties and earn a passive monthly income.

The Basics of REITs

Investing in real estate through REITs can be a hassle-free and affordable method that is easy to understand for most investors. These companies generate profits from income-producing properties by owning and operating them, purchasing mortgages or mortgage-backed securities. When investors buy shares of a REIT, they receive passive income through dividend payments. Generally, investors prioritize REITs for dividends rather than stock appreciation, although shares may fluctuate in value. However, dividend restrictions can make it challenging for the overall value of the REIT to increase.

REIT Dividends

REITs are required to distribute at least 90 percent of their taxable income to maintain their status as securities. Dividends include rental income and capital gains, which REITs do not pay corporate income tax on. However, investors receiving the dividends pay the taxes at the ordinary income tax rate rather than the lower dividend tax rate. The downside for investors is that REITs have several ways to reduce the taxable income they are required to pay out as dividends, making the 90 percent figure somewhat misleading. While REITs offer tax advantages, such as depreciation and mortgage interest deductions, they also affect the amount of money that ends up in the pockets of shareholders.

Multifamily REITs

Investors who want to diversify their portfolio with a specific type of real estate can benefit from REITs that often focus on one asset class, such as medical office buildings, hotels, and multifamily properties. Since the Internal Revenue Code mandates that a REIT earns at least 75 percent of its gross income from rent, mortgage interest, or real estate sales, many REITs have made multifamily properties a significant component of their portfolio. As a result, multifamily assets are an attractive investment option for generating consistent rental income.

Multifamily REIT Performance

REITs have historically performed better than the S&P 500, but the performance of a particular REIT depends on the type of real estate it invests in. REIT dividends are influenced by various factors such as population growth, job growth, accessibility of homeownership, and population ages, which affect the multifamily real estate sector. Multifamily investment remains attractive due to ongoing inventory issues with single-family homes, population growth, and expected rent increases. Multifamily REITs have been performing moderately well, with average returns of 1.9 percent as of August 2021, surpassing office REITs at -4.31 percent, but lagging behind corrections REITs at 11.99 percent.

Finding a Multifamily REIT 

REITs are available in various types, including publicly-traded, public but unlisted, and private REITs. Publicly-traded REITs are the most accessible and can be bought through a broker like any other stock. Multifamily properties are one of the 12 equity subsectors of REITs, and multifamily REITs often concentrate on particular markets, such as urban or suburban regions, or a specific geographic area like the East or West Coast.

To aid your research, here are some popular multifamily REITs to consider:

• AvalonBay Communities (NYSE:AVB)

• Camden Property Trust (NYSE:IRT)

• Apartment Investment and Management Company (NYSE:AIV)

• Starwood Property Trust (NYSE:STWD)

As always, do your due diligence before making any investment. 

Final Thoughts

Investors can benefit from adding REITs to their portfolios as they offer a simple and cost-effective way to earn passive income. However, investors with more significant amounts to invest should explore other options that offer higher potential returns. Real estate syndications, such as those involving multifamily assets, typically outperform both the stock market and multifamily REITs. To get started with Life Bridge Capital and access these opportunities, investors can easily join the company’s email list for future notifications. As a leading real estate syndication company, Life Bridge Capital offers investment partners the chance to generate a passive monthly income by leveraging shares of multifamily rental properties.