Is Investing In A REIT Or A Real Estate Syndication Right For You?

by | Jul 14, 2022 | Investing Advice

If you want to start investing in real estate, but have no desire to become a landlord, you’re not alone. Most people don’t relish the idea of fixing toilet emergencies at 3am, us included. 

Investing in a real estate investment trust, or a REIT, can be a great first step for many investors. REITs are easily accessed, 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 assume that investing in an apartment REIT means you’re investing directly in an apartment building.

That couldn’t be further from the truth.

Before you make REITs your real estate investment move, it’s important you fully understand what investing in a REIT means for you and your money. The only way you can make the best decision, when it comes to investing, is to be fully informed about your options. 

Keep reading to learn more about The 7 biggest differences between REITs and real estate syndications.

 

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. There are separate REITs available for apartment complexes, shopping centers, office buildings, and much more. 

With real estate syndications however, you invest in a single property in a single market. You have access to all the details, such as the exact location, the number of units, the financials specific to that property, and the business plan for your investment.

 

Difference #2 – Type of Ownership

When you invest in a REIT, you’re purchasing shares in the company that owns the real estate property.

Investing in a real estate syndication means you and other investors are directly contributing to the purchase of a specific property through the entity, usually an LLC or an LP, that holds the asset. 

 

Difference #3 – Access to Invest

REITs are easy to access, as most of them are listed on major stock exchanges. You can invest in REITs directly, through mutual funds, or via exchange-traded funds. This can be done quickly and easily online.

Real estate syndications are more difficult to find because they’re under an SEC regulation that disallows public advertising. You typically need to know the sponsor or other passive investors to gain access to the deal. An additional existing hurdle is that many syndications are only open to accredited investors.

Even after obtaining a connection, becoming accredited, and finding a deal, you should allow several weeks to adequately review the investment opportunity, sign the legal documents, and send in your funds. 

 

Difference #4 – Investment Minimums

You can invest in a REIT for next to nothing. When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few dollars, making the monetary barrier to entry quite low.

Real estate syndications, on the other hand, have much higher minimum investments, usually $50,000 – $100,000. This is a significantly larger capital investment than what’s required for a REIT.

 

Difference #5 – Liquidity of Your Investment

With a REIT, your money is liquid. This means at any time, you can buy or sell shares of your REIT.

When you invest in real estate syndications, there’s an accompanying business plan that typically defines the holding period for the property, often five years or more. During the holding period your money is locked in and unavailable to you.

 

Difference #6 – Tax Benefits

One of the biggest advantages of investing in real estate syndications as opposed to REITs is tax savings. When you invest directly in a property, including real estate syndications, you receive a variety of tax deductions. The main benefit is depreciation, or the ability to write off the value of an asset over time.

Many times, the depreciation benefits surpass the cash flow in a deal. Even if you show a loss on paper you can still have positive cash flow. Those paper losses can offset your other income, like that from an employer or W-2 job.

Investing in a REIT means 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. On top of that, there are no tax breaks, and unfortunately you can’t use that depreciation to offset any of your other income.

Dividends are taxed as ordinary income, which can actually contribute to a larger tax bill, rather than smaller one.

 

Difference #7 – Return on Your Investment

As you know, returns for any real estate investment can vary greatly. Looking at the historical data over the last forty years shows an average of 12.87% per year total returns for exchange-traded U.S. equity REITs. Stocks, by comparison, averaged 11.64 percent per year over that same period.

On average, this means if you invest $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends.

When you factor in cash flow and the profits from the sale of the property, real estate syndications can typically offer approximately 20.00% average annual returns, which is substantially higher than investing in REITs and stocks.

If you invest $100,000 in a real estate syndication deal with a five-year hold period and a 20 percent average annual return, you can potentially make $20,000 per year for five years, or $100,000, taking into account both cash flow and profits from the sale. That being said, you can how the right syndication deal can sometimes can 2X or double your money over the course of those five years.

 

Deciding if You Should Invest in a REIT or a Real Estate Syndication

 

Now you might be asking yourself, which one should you invest in?

As you know, there’s no one-size-fits-all investment that works for everyone.

If you only have $1,000 to invest and want ongoing access to that money, REITs might be a great fit for you. 

If you have more capital to invest and you’re interested in more direct ownership, like being able to talk to the sponsors directly, and want more tax benefits, a real estate syndication may be a better fit.

The great thing is, it doesn’t have to be one or the other. Many investors start with REITs and then migrate toward real estate syndications later. Or maybe you’ll decide to dabble in both to diversify your portfolio. 

Either way, just by getting started investing in real estate, you’re making forward progress. Moving forward toward your goals is always a success, whether you choose to invest directly or indirectly.

0 Comments