REITs or Syndications?
While many investors want to put money into real estate and enjoy the benefits of passive income, not everyone is interested in becoming a landlord. Managing the property and dealing with emergency situations isn’t appealing to everyone. REITs and syndications immediately come to mind for passive real estate investors.
Definitions
REIT, or Real Estate Investment Trust is a company that invests in income-producing commercial real estate. A REIT tends to specialize in specific property types such as office buildings, shopping malls, or multifamily apartment buildings. You can invest in publicly-traded REITs by buying shares through a broker, just like how you would buy stocks.
A real estate Syndication is a way multiple groups of investors can pool funds together to purchase an existing property or build a new one. They provide investment opportunities to passive investors and contribute to creating passive income. Syndications are governed by the Securities and Exchange Commission (SEC) and must file documentation (i.e., private placement memorandum) with and report to them. Originally, these types of investment properties were exclusive to the very wealthy, but now, they are much more accessible to the accredited investor.
Differences
Here are the seven biggest differences between a REIT and a real estate syndication:
1. Number of Assets
2. Ownership
3. Access to Invest
4. Investment Minimums
5. Liquidity
6. Tax Benefits
7. Returns
Difference #1: Number of Assets
With a REIT, you are typically investing in a blind fund that holds a portfolio of properties across multiple markets. You don’t get a say in which property the REIT purchases, but it could be great for diversifying your investment portfolio.
On the other side, with most real estate syndications, you are investing in a single property in a single market. You will know exactly where the property is, all the financials specific to that property, what the business plan is and what the expected return is.
Difference #2: Ownership
When you invest in REITs, you are buying shares in a company, just like when you buy shares in Facebook or Apple. You do not own the underlying real estate. Rather, you own shares in the company that owns those assets.
When you invest in a syndication, or a group investment, you are investing directly in a specific property. That means that, together with the other limited partner investors and general partners, you will own the entity (usually an LLC) that holds the asset. Thus, you have direct ownership.
Difference #3: Access to Invest
The majority of REITs are listed on major stock exchanges, just like any other public stock. You can invest in REITs directly, or you can invest through mutual funds or exchange-traded funds. Because most REITs are publicly listed, they are easy to find and to invest in.
Got $100 to invest? You can probably invest in a REIT within the next ten minutes. Done and done.
Real estate syndications, on the other hand, can be more difficult to find, and the process to invest can involve a bit more time and effort. Many real estate syndications are under an SEC regulation that disallows public advertising. As such, you would need to be connected with someone who’s got a deal you can invest in.
The process of investing in a real estate syndication usually takes not a few minutes, but rather, a few weeks. This includes time to review the investment opportunity, sign the legal documents, and send in your funds. Once you invest in the deal, you will likely start seeing ongoing passive income as soon as the month right after the property closes.
Further, many real estate syndications are only open to accredited investors, which can be an additional hurdle for some investors.
Difference #4: Investment Minimums
Just as when you buy stocks, when you invest in a REIT, you are purchasing shares, some of which can be just a few bucks. Thus, this method of real estate investing (that is, investing in a REIT) can be done with a very small amount of money, which makes it quite appealing to many investors, particularly those just getting started with real estate investing.
On the flip side, syndications typically have higher minimum investments. Often the minimum investment amount is $50,000. Thus, you will need quite a bit more capital to invest in a real estate syndication.
Difference #5: Liquidity
This is another aspect in which REITs reign supreme. Just as when you invest in stocks, REITs keep your investment liquid. That means that at any time, you can buy or sell shares, and your money is not locked in for a set amount of time.
When you invest in a real estate syndication, you are investing directly in a real piece of property. Just like when you buy a home, you can’t buy and sell that with the click of a button. The same applies for real estate syndications. The business plan often includes holding the asset for a certain amount of time, during which your money would be illiquid.
So if you’re thinking of investing $50,000 but may need some of that in a couple of years when Junior goes off to college, probably best not to put that into a real estate syndication, where that money will be locked in for a set amount of time.
Difference #6: Tax Benefits
One of the biggest benefits of investing in real estate is the tax benefits. When you invest directly in a property, you get the benefit of a variety of tax deductions, including depreciation (i.e., writing off the value of an asset over time). In some cases, particularly with accelerated depreciation, those tax benefits can be quite substantial.
In many of the investments in our portfolio, the depreciation benefits alone are reason enough to invest. The depreciation benefits often surpass the cash flow, so you’re showing a loss on paper while you’re actually getting positive cash flow. Further, you may use those paper losses to offset your other income, like income from your job.
When you invest in a REIT, because you’re investing in the company and not directly in the real estate, the tax benefits are a bit less exciting. You do get the benefits of depreciation, but those are factored in before you get your dividends, so you don’t get any tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.
Further, any dividends are taxed as ordinary income, which can contribute to a bigger, rather than smaller, tax bill.
Difference #7: Returns
Let me first say, that returns for each individual investment can vary wildly, depending on the assets, the people, and the timing.
That being said, when looking at historical data between 1972 and 2023, total returns for exchange-traded U.S. equity REITs averaged 12.7 percent per year. By comparison, stocks averaged 10.2 percent per year over that same period.
This is pretty good. This means that, on average, if you were to invest $100,000 in a REIT, you could expect somewhere around $12, 700 per year in dividends.
For the multifamily real estate syndications, when factoring in both cash flow and profits from the sale of the asset, investments typically offer upwards of 20 percent average annual returns.
If you were to invest in a real estate syndication with a hold period of five years and a 20 percent average annual return, you would essentially be making $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale).
That means that you would double your money, from $100,000 to $200,000, over the course of those five years.
So, Which One Should You Invest In?
Well, there you have it, the seven biggest differences between a REIT and a real estate syndication. All in all, there’s no one best investment for everyone.
If you had $1,000 to invest and wanted to be able to access that money freely, you might invest it into a REIT. If you had a bit more to invest and wanted direct ownership and more tax benefits, you might be more interested in a real estate syndication.
And also, it doesn’t have to be one or the other. You might start in a REIT and then invest in a real estate syndication later on. Or you might dabble a bit in both to diversify. Either way, investing in real estate, whether directly or indirectly, is always a win in our book.
