The brief time I spent as a landlord taught me that I’m not made for active real estate investments!
If you’re like me, you’re looking for more passive investments that offer more significant ROI.
While I chose to work in the real estate syndication side of investing, other investors are looking for something more familiar and similar to the stock market.
The next logical step that these investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks.
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 that if you invest in an apartment REIT, it’s the same as investing directly in an apartment building.
Because of that misconception, many investors assume that a real estate investment trust is basically the same as a real estate syndication.
That couldn’t be further from the truth.
Let’s explore the seven most significant differences between REITs and real estate syndications.
Once you understand both, you can decide which fits your investment goals the best.
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 significant diversification for investors. For example, individual 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 purchasing 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.
On the other hand, real estate syndications are often under an SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. Another 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 purchase 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 to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.
Difference #5: Liquidity
You can buy or sell shares of your REIT at any time, and your money is liquid.
However, real estate syndications are accompanied by a business plan that often defines holding the asset for a certain amount of time (usually five years or more), during which your money is locked in.
Difference #6: Tax Benefits
One of the most significant 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).
Often, 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. Still, those are factored in before 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, contributing 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 total annual 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 five years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over those five years.
Choosing between REITs and Syndications
So, which one should you invest in?
There’s no one best investment for everyone (but you knew that, right?).
REITs are great for you if you have smaller investments (around $1000) you’d like to put into the market.
You should pursue a real estate syndication if you want more significant, longer-term investments with more tax benefits and direct ownership.
You also have the option of diversifying!
Whatever your choice, make sure you do your research and find the investments to elevate and solidify your personal and financial goals.