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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 return options is a commercial real estate syndication. But there are so many different asset types you can choose from.

Even the word syndication can produce this feeling of overwhelm until you dive in and really begin to understand how simple it can be.

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.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. Higher Cap Rates on Hotels

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 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.

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 Three Keys Investments, 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.

To learn more about passive real estate investing and how to invest in upcoming real estate syndication deals, sign up for our Investor Club.

This work by Annie Dickerson is licensed under CC BY-NC-SA 4.0


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