REITs and Real Estate Syndications: What’s the Difference?

by | Jun 11, 2022 | Investing Advice | 0 comments

Many people are interested in investing in real estate but are dissuaded by the time commitment involved in becoming a landlord. As busy doctors, we wanted to generate a passive income stream that would allow us to develop financial freedom and leave a lasting legacy. We simply didn’t have the time to devote to managing multiple properties. 

If you’re interested in real estate investing but would rather avoid tenants, termites, and toilets, you’re not alone. 

Many investors, who are also busy professionals, with little time to spare for managing properties, are looking for the best way to passively invest in real estate.  

In this article, we cover the key differences between REITs (real estate investment trusts) and real estate syndications. 

 

Investing in a REIT

When you put your capital into a REIT, you’re buying stock in a company that invests in commercial real estate. But that doesn’t mean that you’re investing in a property directly. For example, you’re not investing directly in an apartment building when you invest in an apartment REIT. 

Let’s examine the 7 most significant differences between REITs and real estate syndications.

A Portfolio of Assets

A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great 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. 

Purchasing the Property

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 the purchase of a specific property through the entity (usually an LLC) that holds the asset. 

How 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.

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, 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. 

Financial Buy-In

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.

Lock-In Period

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.

Tax Breaks

One of the biggest 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).

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.

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 prior to 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.

Return on Investment

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 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 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.

 

Are REITs or Real Estate Syndications Right for You?

It goes without saying that there’s no such thing as a one-size-fits-all investment. 

The best way to invest your money depends on your personal circumstances and financial goals. If you have a smaller amount to invest and don’t want to lock your money into an investment, you may want to look into REITs a little more. However, if you have a larger amount of capital available, you’re looking for an investment that gives you direct ownership, and you’re excited by the multiple tax advantages, a real estate syndication could be exactly what you’re looking for. 

Of course, there’s no reason why you can’t try both to see which is the best fit for you. Maybe you’d prefer to start off by investing in REITs, then move money into a real estate syndication later. Or you could even diversify your portfolio by putting money into both and see which investment vehicle works best for you in building generational wealth.

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