REITs Versus Real Estate Syndications And How Are They Different?
by | Mar 30, 2021
If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Fixing toilet emergencies on Friday night isn’t appealing to most people, myself included.
Maybe you’re already running your own business, immersed in your career, and juggling a busy family and you don’t have time for another side project but you’re interested in real estate as an investment vehicle.
When looking for a more hands-off approach to real estate, most investors quickly stumble upon real estate investment trusts (REITs), which are easy to access, just like stocks, bonds, or mutual funds.
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, if you invest in an apartment REIT, it’s the same as investing directly in an apartment building.
That couldn’t be further from the truth.
Let’s explore the seven most significant 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 in an asset class, which could mean significant diversification for investors. Separate 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. An additional existing 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 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.
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 various tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).
Frequently, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cashflow. Those paper losses can offset your other income, like that from an employer. And if your profession is in real estate, like my construction businesses, the depreciation benefits can be incredible.
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, but 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, which can contribute 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 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 dividends, which is great ROI.
Between the cash flow and the profits from the asset’s sale, 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.
Just this year I had a syndication investment complete its hold period, and my family doubled its money in 2 and half years. This equates to an almost 30% return each year. While all results vary, it shows what is possible with investing in syndications.
So, based on these seven differences between REITs and real estate syndications, which one should you invest in?
Here’s the straight talk, there is not a “best” option across the board. You probably knew this anyway, but your situation is unique, and your investment strategy will be too. After reading this article, you’re aware of the definitions and the differences and can make a much more informed decision than before.
If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have a bit more available and want direct ownership, to talk to the sponsors directly, and tax benefits sound desirable, 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 forward progress.