by Joe Firmin 3 ½ Minute Read
You think real estate is a good investment. It’s interesting to you, right? But… you’d rather avoid becoming a landlord. Dealing with an eviction or fixing toilet emergencies at 3am isn’t appealing to most people. I know… shocker.
The next logical step that many investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks. They are all over the trading sites now.
What is a REIT anyway? When investing in a REIT, you’re buying stock in a company that invests in real estate. So, if you invest in an apartment REIT, it’s like you’re investing directly in an apartment building, right?
No. It’s not.
Here are 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, usually in a specific asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls (ouch!), office buildings, elderly care, etc.
On the flip side, with real estate syndications, they are deal specific. 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. You can visit it, take pictures with your family in front of it (Instagram?).
Difference #2: Ownership
When investing in a REIT, you purchase shares in the company that owns the many 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 owning entity (usually an LLC) that holds the asset. You are the company (The same? Huh? Think again… read on – especially when it comes to tax time).
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, not much research involved.
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 and found a deal, you should allow yourself adequate time 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.
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 5 years or more), during which your money is locked in.
While the liquidity of a REIT can be a positive thing, it can also be negative when mixed with market emotions. As noted in this article from Seeking Alpha, when 93% of all REIT securities plummeted in value in March 2020 achieve negative total returns, it is hard to keep faith.
Difference #6: Tax Benefits
One of the biggest differences of investing in REITs versus real estate syndications is the 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. You can read more in-depth on this awesome benefit in our post HERE.
When you invest in a REIT, because you’re investing in the overall holding company and not directly in the real estate, you do get depreciation benefits, but they are factored in prior to dividend payouts (if they pay a dividend). 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 bigger, 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 return dividends, which is a great ROI (return on investment).
Real estate syndications, however, between cash flow and profits from the sale of the asset, can offer around 15-20 percent average annual returns. More on returns and projections can be discovered in our specific post about them.
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. Add in the tax benefits and the return is even better.
So, which one should you invest in?
While we’re partial to real estate syndications, all in all, there’s no one best investment for everyone (but you knew that, right?). I know, it sounds boring and not controversial, but it’s true.
If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have more capital and want direct ownership and more tax benefits, a real estate syndication may be a better fit.
And remember, it doesn’t have to be one or the other. You might begin with REITs and then migrate toward real estate syndications later. Or you might dabble in both to diversify. Either way, investing in real estate, whether directly or indirectly, is solid forward progress.
For more information on real estate syndications please read our other blog post as well which describes the structure and more cool stuff.
Remember, you won’t know about the opportunities unless you’re on our investor list, so please sign up. We’ll only have a few a year, so don’t worry, you won’t be inundated.
Let us know if you have any questions or concerns, always happy to engage with you and help you out!