The 7 Key Differences Between REITs And Real Estate Syndications

by | Feb 9, 2022 | Uncategorized | 0 comments

So, you’re interested in real estate investing, but have no desire to become a landlord? 

You’re not alone and quite frankly you’re doing yourself a big favor by being honest about your capabilities and intentions. Becoming a landlord takes a special skill set and you’re wise to let someone else do manage the day-to-day operations of an investment property.

If you’re looking for an easy way to jump right into real estate investing, without becoming a landlord, you’ve got two main options: Real estate syndications and real estate investment trusts (REITs). 

On one hand, you can get in on the cheap, but you own no real share of the assets. On the other hand, you contribute more capital, but are passively invested in real property. There are seven key differences between REITs and Multifamily Syndications, but first…

 

What is a REIT, anyway?

When investing in a REIT, you’re buying stock in a company that invests in commercial real estate. So, most people naturally figure, if you invest in an apartment REIT, it’s the same as investing directly in an apartment building.

That couldn’t be further from the truth.

Let’s explore the 7 biggest differences between REITs and real estate syndications:

 

Difference #1: Number of Assets

A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls, office buildings, elderly care, etc.

On the flip side, with real estate syndications, you invest in a single property in a single market. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment. 

 

Difference #2: Ownership

When investing in a REIT, you purchase shares in the company that owns the real estate assets.

When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset. 

Difference #3: Access to Invest

Most REITs are listed on major stock exchanges, and you may invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily online.

Real estate syndications, on the other hand, are often under an SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. An additional existing hurdle is that many syndications are only open to accredited investors.

Even once you have obtained a connection, become accredited, and found a deal, you should allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds. 

 

Difference #4: Investment Minimums

When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few bucks. Thus, the monetary barrier to entry is low. The returns are also historically lower than investing in syndications.

Alternatively, syndications have 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 significantly higher capital than REITs.

 

Difference #5: Liquidity

At any time, you can buy or sell shares of your REIT and your money is liquid.

Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 3-5 years), during which your money is locked in.

 

Difference #6: Tax Benefits

One of the biggest benefits of investing in real estate syndications versus REITs is tax savings. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).

Oftentimes, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer.

When you invest in a REIT, because you’re investing in the company and not directly in the real estate, you do get depreciation benefits, but those are factored in prior to dividend payouts. There are no tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.

Unfortunately, dividends are taxed as ordinary income, which can contribute to a larger, rather than smaller, tax bill.

 

Difference #7: Returns

While returns for any real estate investment can vary wildly, the historical data over the last forty years reflects an average of 12.87 percent per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64 percent per year over that same period.

This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is great ROI.

Between the cash flow and the profits from the sale of the asset, real estate syndications can offer around 20 percent average annual returns.

As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may make $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over the course of those five years.

 

Are REITs or a Real Estate Syndications Right for You?

Investing your hard-earned money is a big decision. Unfortunately, there’s no cookie-cutter investment that’s right for everyone. The best way to determine if a REIT or a real estate syndication is the best fit for you is to get clear on your financial goals and lifestyle desires.

If you want easy access to your capital, REITs might be a good fit. If you’d like direct ownership and more tax benefits, definitely chat with me to learn about and explore your real estate syndication options.

The beauty of real estate investing is that you don’t have to choose one option over the other, feel free to dabble in both as you diversify your portfolio and get some experience under your belt. You can always get more choosy down the road. The bottom line is if you’re interested in real estate investing, get started somewhere today.

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