Why Multifamily Passive Investing Distributions Outshine Public REIT Dividends

When it comes to passive investing in real estate, one of the first decisions investors face is whether to invest in public Real Estate Investment Trusts (REITs) or private multifamily investments. At first glance, the high dividend yields of public REITs may seem enticing. However, a closer look reveals some significant differences that highlight the advantages of multifamily passive investing. 

A Cautionary Tale of "Impressive" Dividends

Imagine a scenario where a publicly traded REIT showcased a dividend yield of over 15%, capturing the interest of many investors. However, a deeper dive into the company’s financials painted a troubling picture. While the REIT reported robust distributable income, a substantial portion came from non-cash sources like “Paid-in-Kind” (PIK) interest. This meant that instead of receiving cash payments, the REIT added unpaid interest to the borrower’s outstanding loan balance and booked it as income.

In reality, the REIT’s operating cash flow—the actual money available for paying dividends—was alarmingly low. Despite reporting tens of millions in distributable income, the REIT’s actual cash flow was barely enough to cover its commitments, forcing it to rely on accounting strategies rather than genuine earnings. This kind of financial engineering may keep dividends flowing temporarily, but it raises questions about sustainability and transparency.

The Key Differences: Distributions vs. Dividends

Passive multifamily investing operates differently, offering a more transparent and stable approach to generating income. Here are the key distinctions:

1. Source of Income:

   • REIT Dividends: Public REITs often pay dividends from a mix of cash flow and non-cash income, such as accrued interest or gains from asset sales. These dividends can fluctuate significantly based on market conditions and accounting practices.

   • Multifamily Distributions: In private multifamily investments, distributions come directly from rental income generated by the property. This cash flow is tied to real assets and reflects actual operational performance.

2. Transparency:

   • REITs are subject to complex accounting and reporting rules, which can obscure the true health of the business. Non-cash income, like the PIK interest in the earlier example, can inflate reported earnings while masking cash flow issues.

   • Multifamily sponsors typically provide straightforward investor reports, detailing income, expenses, and the precise source of distributions. However, it is important to acknowledge that, like any investment, multifamily investments can also face challenges depending on market conditions. This clarity builds trust and confidence.

3. Tax Efficiency:

   • REIT dividends are often taxed as ordinary income, reducing their net value to investors.

   • Multifamily distributions benefit from tax advantages like depreciation and amortization, which can significantly shield cash flow from taxes and enhance after-tax returns.

4. Stability:

   • Public REIT dividends are subject to market volatility, interest rate changes, and broader economic trends.

   • Multifamily investments are grounded in the consistent demand for housing, offering steadier cash flow even during economic fluctuations.

   
   

Why Multifamily Investing Wins

For passive investors, the goal is clear: generate stable, reliable income while minimizing risk. Multifamily real estate excels in this regard by:

• Providing Cash Flow You Can Count On: Unlike REITs, where dividends may include non-cash components, multifamily distributions are backed by actual rental income.

• Offering Tax Advantages: Depreciation and other deductions can offset taxable income, leaving more money in your pocket.

• Aligning Interests: Sponsors in multifamily deals are often co-invested, ensuring their incentives align with investors.

Conclusion

While public REITs may offer the allure of high dividend yields, the underlying reality can often be more complicated—and less profitable—than it appears. Multifamily passive investing, with its transparency, stability, and tax efficiency, provides a compelling alternative for those seeking dependable income and long-term growth. Sponsors also actively work to address challenges and safeguard investor interests, ensuring the best possible outcomes even during tough times.

If you’re looking for an investment strategy that prioritizes your financial well-being over flashy but unsustainable returns, multifamily real estate is a choice worth considering. In this arena, what you see is what you get: real cash flow, real assets, and real opportunities to build wealth over time.

P.S. If one of your priorities, like mine, is building and preserving your wealth through multifamily real estate investments, click here to download my new eBook: The Ultimate Guide to Creating & Preserving Your Wealth.

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About Ellie Perlman

Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.

*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.