7 Biggest Differences Between REITs And Real Estate Syndications
If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Surprisingly, most people aren’t interested in dealing with a clogged toilet at 3 A.M.
The next logical step that many investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks.
What is a REIT, anyway?
When you invest in a REIT, you’re buying stock in a firm that invests in commercial real estate. So, if you invest in an apartment REIT, it’s the same as if you bought an apartment complex, right?
Not necessarily.
Let’s look at the seven most significant distinctions between REITs and real estate syndications:
Difference #1: 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, all of which can be done swiftly and conveniently online.
Real estate syndications, on the other hand, are frequently subject to SEC regulations that prohibit public advertising, making them difficult to locate without first learning about the sponsor or other passive investors. Another hurdle is that many syndications are only available to accredited investors.
Even after you have made a connection, become accredited, and found a deal, you should plan for it to take several weeks to review the investment opportunity, sign the legal documents, and wire your funds.
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: 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 #4: Liquidity
You can purchase or sell shares of your REIT at any moment, and your money is liquid.
Real estate syndications, on the other hand, are backed with a business plan that often requires holding the asset for a specific period of time (commonly 5 years or more) during which your money is locked in.
Difference #5: Investment Minimums
When you invest in a REIT, you are purchasing shares on the public exchange, which can be as low as a few dollars. As a result, the financial barrier to entry is minimal.
Syndications, on the other hand, sometimes need larger minimum investments, such as $50,000 or more. Real estate syndication investments require substantially more capital than REITs, ranging from $10,000 to $100,000 or more.
Difference #6: Tax Benefits
One of the most significant advantages of real estate syndications over REITs is the tax savings. When you invest directly in a property (including real estate syndications), you can take advantage of a number of tax benefits, the most important of which is depreciation (i.e., writing off the value of an asset over time).
Depreciation benefits frequently outweigh cash flow. As a result, you may appear to be losing money on paper but have a positive cash flow. Those paper losses can be used to balance other sources of income, such as a salary from a job.
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. You won’t get any tax savings on top of that, and you won’t be able to utilize the depreciation to offset any other income.
Dividends, unfortunately, are taxed as regular income, which might result in a higher, rather than lower, tax burden.
Difference #7: Returns
While returns on any real estate investment can vary greatly, historical data shows that exchange-traded U.S. equity REITs have averaged 12.87 percent per year in total returns over the last forty years. Stocks, on the other hand, averaged 11.64 percent per year over the same time span.
This means that if you invest $100,000 in a REIT, you can expect to receive roughly $12,870 in dividends per year, which is a terrific return on investment.
Real estate syndications, on the other hand, can offer around 20% average annual returns on cash flow and earnings from asset sales.
For example, a $100,000 syndication transaction with a 5-year hold period and a 20% average annual return can produce $20,000 every year for 5 years, or $100,000 (this includes both cash flow and profits upon the sale), implying that your money has doubled in value.
Conclusion
So, which one should you invest in?
Overall, there is no single best investment for everyone (but you already knew that).
If you have $1,000 to invest and want to be able to access it at any time, REITs are a good option. A real estate syndication may be a better option if you have a little more capital to invest and want direct ownership with more tax benefits.
Remember that it doesn’t have to be either/or. You might start with REITs and move on to real estate syndications later. You might even try your hand at both to broaden your horizons. Investing in real estate, whether directly or indirectly, is always a step in the right direction.