You’re interested in real estate investing, but you’d rather avoid becoming a landlord? Trust us, you’re not alone. Most people, us included, don’t love the idea of getting emergency calls in the middle of the night.
For many would-be investors who’d like to avoid becoming a landlord, the next logical step is to invest in a real estate investment trust, or a REIT. REITs are easy to access, just like stocks.
What’s a REIT?
When you invest in a REIT, you’re buying stock in a company that invests in commercial real estate. Many people mistakenly assume if you invest in an apartment REIT, you’re investing directly in an apartment building.
That’s not the case at all.
Keep reading to explore the 7 biggest differences between REITs and real estate syndications.
Difference #1 – Number of Assets Held
A REIT is a company that holds a portfolio of properties across multiple markets in an asset class. This gives investors a great way to diversify. You can invest in separate REITs for apartment buildings, shopping centers, office buildings, senior care facilities, and many more.
With real estate syndications, however, you invest in a single property in a single market. You know the exact location, the number of units, the financial information specific to that property, and the business plan that’s outlined for your investment.
Difference #2 – Property Ownership
When investing in a REIT, you purchase shares in the company that owns the real estate assets. You’re not directly involved in the purchase of the investment property.
On the other hand, when you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property. This is done through the entity that holds the asset, usually an LLC.
Difference #3: Access to Invest
Since most REITs are listed on major stock exchanges, you’re able to invest in them directly. This can be done through mutual funds, or via exchange-traded funds, quickly and easily online.
Real estate syndications are different. They’re often under an SEC regulation that disallows public advertising. This makes syndication deals challenging to find without knowing the sponsor or other passive investors. An additional obstacle to overcome is that many syndications are only open to accredited investors.
Once you’re successful in obtaining a connection, becoming accredited, and finding a deal, you should still allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds.
Difference #4: Investment Minimums
Investing in a REIT means you’re purchasing shares on the public exchange, and you can do so for as little as a few dollars, making the monetary barrier to entry quite low.
Real estate syndications have much higher minimum investments, often $50,000 or more. While 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 of Your Money
As an investor in a REIT, you can buy or sell your shares at any time, making your money liquid.
With real estate syndications, however, your money is locked in. Syndication deals are accompanied by a business plan that typically defines holding the asset for a certain amount of time, often 5 years or more, during which your money will be unavailable to you.
Difference #6: Tax Advantages
One of the biggest benefits of investing in real estate syndications as compared to REITs are the tax advantages. When you invest directly in a real estate property, syndications included, you receive a variety of tax deductions. The main benefit is depreciation, or the ability to write off the value of the asset over time.
The depreciation benefits oftentimes surpass the cash flow. This means that while you may show a loss on paper, you can still have positive cash flow. Those paper losses come in handy to offset your other income, like that from an employer.
Investing in a REIT is different because you’re investing in the company and not directly in the real estate. You do get depreciation benefits, but they’re factored in prior to dividend payouts. There are no additional tax breaks on top of that, and you, unfortunately, can’t use that depreciation to offset any of your other income.
Another drawback is that dividends are taxed as ordinary income, which can contribute to a larger tax bill, rather than a smaller one.
Difference #7: Expected Returns
As you’ve probably guessed, returns for any real estate investment can vary greatly. Historically, over the last forty years data shows that investors received an average of 12.87 percent per year total returns for exchange-traded U.S. equity REITs. To compare, stocks averaged 11.64 percent per year over that same time period.
On average, this means 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 around 20 percent average annual returns, between the cash flow and the profits from the sale of the asset.
For instance, 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, taking into account both cash flow and profits from the sale. This means you double your money over the course of those five years.
Is a REIT or a Real Estate Syndication Right for You?
As you know, there’s no cookie-cutter investment that’s a great fit for everyone.
If you have limited capital to invest and want to access that money freely, you might consider investing in REITs. However, if you have a bit more available to invest, want direct ownership, want to be able to talk to the sponsors directly, and want more tax benefits, a real estate syndication may be a better fit.
Remember, real estate investing doesn’t have to be one or the other. You might get started with REITs and then move toward real estate syndications later. Or you could diversify and dabble in both. Regardless of how you choose to invest in real estate, whether it’s directly or indirectly, you’re moving forward toward your goals of securing your financial future.