Blog Highlights:
If you’re interested in real estate investing, but don’t have the skills or desire to become a landlord, you’re not alone. A bustling landlord role isn’t for everyone, inducing myself.
Many investors getting started in real estate will move toward a real estate investment trust (REIT), because of its easy access, similar to buying stocks.
Explanation of a REIT
Investing in a REIT means you’re buying stock in a company that invests in commercial real estate. Most people make the mistake of assuming that when you invest in an apartment REITS you’re investing in an apartment building directly. This common misconception couldn’t be further from the truth.
Keep reading for a breakdown of the biggest differences between a REIT and a real estate syndication.
#1 – Number of Properties
Investing in a REIT is a great opportunity for diversification. As the name suggests, a REIT is a company that holds a portfolio of properties across multiple markets in an asset class. There are REITs available for various types of commercial real estate like apartment complexes, shopping centers, office buildings, assisted living facilities for the elderly and more.
Real estate syndications, on the other hand, allow investors to invest in a single property in a single market. As the investor, you have specific information about the property, like the exact location, the number of units, specific financials and the business plan for the real estate syndication project.
#2 – Type of Ownership
Investing in a REIT means you’re purchasing shares in the company that owns the real estate properties.
Invest in a real estate syndication allows you and the other investors to directly contribute to the purchase of a specific property. Typically the asset in a real estate syndication is held in an LLC or LP.
#3 – Ease of Investing
For investors, access to a REIT is quick and easy and can be done online, similar to buying stocks. Most REITs are listed on major stock exchanges. Investors have the option of investing in them directly, through mutual funds or exchange-traded funds..
Real estate syndications are a little more difficult to find without knowing the sponsor or other passive investors. Regulations from the SEC don’t allow syndication deals to be publicly advertised. It should also be noted that many syndications are only open to accredited investors.
For some investors, the real estate syndication process can be a long one. Once you’ve obtained a connection, secured your accreditation, and found a viable deal that fits your goals, you should allow several weeks to complete the process. You’ll have to review the investment opportunity, sign the legal documents, and send in your capital.
#4 – Investment Minimums
It’s much easier to invest in a REIT if you’re working with limited capital. To invest in a REIT, you’re buying shares on the public exchange, which may only require a very minimal initial investment, making the barrier to entry particularly low.
In comparison, real estate syndications require much higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require investors to have significantly more capital than REITs.
#5 – Liquidity of Your Capital
When you invest in a REIT, you’re free to buy and sell shares at any time. As an investor in a REIT, your money is liquid.
Investing in real estate syndications requires a more long-term commitment. These investments are accompanied by a business plan that outlines the holding period for the asset, which is typically five years or more. During the life of the syndication project, your money is locked in.
#6 – Tax Advantages
One of the biggest advantages of investing in real estate syndications over REITs are the tax benefits available to the investors. As a passive investor in a real estate syndication, you’re investing directly in a property, opening up a variety of available tax deductions. The main benefit to investors at tax time is depreciation, or writing off the value of an asset over time.
It’s common for the depreciation benefits to actually surpass the cash flow, meaning on paper you might show a loss, but have positive cash flow. The losses on paper can offset your other income, like that from a W-2 position.
Investing in a REIT, you do get depreciation benefits, but they’re factored in prior to dividend payouts. Because you’re investing in the company and not directly in the property, there are no additional tax advantages and you can’t use that depreciation to offset any of your other income.
As a disadvantage, dividends from a REIT are taxed as basic income, which will most likely mean a larger tax bill for those investors, rather than a smaller one.
#7 – Expected Returns
Predicting returns for any real estate investment can be difficult and can vary wildly among various types of investments and asset classes. That being said, over the last forty years REITs, on average, historically see 12.87 percent per year total returns. This data is for exchange-traded U.S. equity REITs. For comparison, stocks averaged 11.64 percent per year over that same period.
This data suggests that, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, that’s a great ROI.
Real estate syndications can offer investors around 20 percent average annual returns. This data is calculated by factoring in the cash flow and the profits from the sale of the property.
For example, if you invest in a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return you’ll make $20,000 per year for five years, or $100,000, meaning your money doubles over the course of those five years.
Which Type of Real Estate Investment Is Best For You?
There’s no one investment that’s a perfect fit for everyone. The best way to determine if a REIT or a real estate syndication is right for you is to assess your overall financial goals and your lifestyle.
If you don’t have a large amount of capital to invest and want the freedom to access your money whenever you’d like, you might want to consider REITs as your real estate investment avenue. If you have a bit more capital available to invest consider a real estate syndication. This avenue will give you direct ownership, the opportunity to talk to the sponsors directly, and more tax benefits.
Fortunately, your decision doesn’t have to be one or the other. Many investors start out with REITs and then migrate toward real estate syndications later. Or for an opportunity to diversify, you could invest in both. Whether you’re directly or indirectly investing in real estate, it’s a great move toward building wealth and meeting your financial goals.