Are you looking for a way to invest in the real estate market that will allow you to diversify your portfolio, free up your time, and generate more money? If so, then REITs and Real Estate Syndications are two options worth considering. Here is an overview of the difference between these investment strategies.
What Is A Real Estate Syndication?
Real estate syndication is a type of investment strategy that allows investors to pool their money together and purchase significant commercial real estate assets that they may not have access to individually. Syndications use the collective power of their management team and investors’ contributed capital to improve properties, create efficiencies, and boost property value, thus creating a return.
Real estate syndications are attractive to investors because they have lower investment minimums than other real estate investments and offer limited liability protection. In addition, the risk is shared by all of the members in the commercial real estate syndication group, which allows investors to diversify their portfolios more efficiently.
What Is A REIT?
On the other hand, a Real Estate Investment Trust (REIT) pools investments from investors into one company that invests in various types of real-estate-related projects such as commercial office buildings or retail malls.
Real estate, by nature, is a local business, so REITs are generally structured to focus on one geographic area. In the US, most of these companies trade publicly (on major exchanges) like common stock and give shareholders dividends based on rental income from properties owned or mortgages passed through them.
REITs are attractive to investors because they typically offer a high-yield, low-risk investment that offers liquidity and the ability to diversify portfolios. In addition, real estate investment trusts offer low minimum investments, and since they are publicly traded on all major stock exchanges, you can invest in REITs on your lunch break.
These basic facts about each will get you started investing in real estate, but let’s dive deeper into the pros and cons of REITs and real estate syndication investments by exploring in detail the seven most significant differences between the two.
Understanding the Differences Between a Real Estate Investment Trust (REIT) and a Real Estate Syndication – Which is Right for You?
Most people assume that investing in an apartment building REIT is the same as investing directly in an apartment building.
That couldn’t be further from the truth.
Difference #1: Number of Assets Included In The Deal
A REIT is a real estate investment trust that owns a portfolio of properties in different geographic locations. Apartments, shopping malls, office buildings, elder care, and other assets are represented by individual REITs.
On the other hand, you invest in a single property in one market with real estate syndications. You know the exact location of the property and how many units it has and how it will be monetized.
Difference #2: Indirect vs. Direct Ownership
When investing in a REIT, you purchase shares in the company that owns the apartment buildings, shopping malls, and other property types. The REIT can hold a single property or multiple properties in different markets. You won’t be able to visit the properties, but you will receive quarterly reports detailing the owned properties.
REITs typically offer smaller units than syndication deals, which means investors need more units to make up larger holdings. In addition, you own less equity per unit when investing in a REIT than through a commercial property syndication deal because there are many other shareholders involved within each entity.
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. Accordingly, you will receive regular reports that detail how much you own in real estate assets, as well as any returns or distributions received from cash flow generated by the purchase of an asset.
Difference #3: Access to Invest
Most REITs are listed on major stock exchanges, and you may invest in REITs through mutual funds or via exchange-traded funds, quickly and easily online.
On the other hand, real estate syndications are often subject to an SEC regulation that restricts public promotion, making them difficult to discover without prior knowledge of the sponsor or other passive investors. Another existing barrier is that most commercial real estate syndications are only open to accredited investors.
Even if you’ve established a connection, gotten approved, and found a bargain, you should give several weeks to evaluate the investment opportunity, sign the legal papers, and submit your money.
Difference #4: Minimum Investment
When you invest in a REIT, you’re buying stock on the public market, which can be as little as a few dollars per share. As a result, the financial barrier to entry is minimal.
On the other hand, real estate syndication investments generally have higher investment minimums of $50,000 or more, reflecting a significantly greater upfront investment requirement than REITs.
Difference #5: Liquidity
You can trade your REIT shares at any time, and your money is liquid. So buying, selling, and trading your REIT investment portfolio, on a whim can be done just like stocks.
Syndications are more complex and generally include a business plan that specifies how long you will maintain the property (often five years or more), during which your cash is confined.
Difference #6: Long Term Tax Benefits
The most significant benefit of investing in real estate syndications rather than REITs is tax savings. When you invest directly in a property (real estate syndications included), you may take advantage of several deductions, the most significant of which being depreciation (i.e., claiming the value of an asset over time).
The return on investment often exceeds the cash flow. As a result, you might report a negative income while having positive cash flow. Those paper deficits may be used to offset other sources of income, such as from an employer.
You do not receive real estate depreciation benefits when you invest in a REIT because you invest in the firm and not the real estate asset itself. Tax advantages are calculated before dividend payments are made. There are no tax savings on top of that, and no depreciation can be used to offset other income.
Unfortunately, dividends are taxed at the same rate as regular income, which can result in a larger tax burden.
Difference #7: Real Estate Investing Returns
Over the last four decades, the historical data shows that total returns for exchange-traded US equity REITs average 12.87 percent each year. Stocks, on the other hand, returned an average of 11.64% per year during that period.
This implies that, on average, if you invested $100,000 in a REIT, you could expect to receive around $12,870 in dividends each year.
Real estate syndications can provide around 20% average annual returns between the cash flow and the revenue from the sale of an asset.
For example, a $100,000 syndication agreement with a five-year holding period and a 20 percent yearly return may result in $20,000 per year for five years (which accounts for both cash flow and profits from the sale), resulting in your money doubling over those five years.
What’s The Difference Between A REIT And A Real Estate Syndication
The key differences include return on investment, liquidity; tax benefits; real estate investment returns, and minimum investments.
For individual investors looking to invest in real estate, should you start by becoming a limited partner in a syndication?
Or should you begin by purchasing shares of a publicly traded company that owns real estate?
In the end, there’s no one-size-fits-all investment solution (but you already knew that, right?).
If you have $1,000 to invest and want to use the money without restrictions, REITs are possible. On the other hand, if you have somewhat more cash available and wish to possess direct ownership, would like to communicate directly with the sponsors, and desire additional tax advantages, a real estate syndication may be ideal for you.
Remember, it’s not necessary to choose one or the other. You might start with REITs and progress to real estate syndications later. Alternatively, you may experiment with both to broaden your portfolio. Any way you slice it, investing in real estate is a step forward for your real estate investing portfolio.
If you’re curious about earning passive income through real estate syndications or want more information, please join Gibby’s Investor Club (for free) today!
We’d love to hear about what kind of real estate investing strategies or techniques that you’re currently using, so don’t hesitate to reach out and send us a message any time. We’re always happy to help answer questions and provide advice regarding commercial real estate investment opportunities (especially syndications).