The Biggest Differences Between REITS And Real Estate Syndication
Updated: Apr 9, 2020
Many of us have learned about the benefits of investing in real estate and want a piece of the pie, but have no desire to be a landlord. Something about fixing water leak emergencies at 3am just doesn’t appeal to you. I get it!
When exploring options you may come across a REIT, or a real estate investment trust. And it makes sense, many REITs are publicly traded, so they’re easily accessible and easy enough to invest in, just like stocks.
What Is A REIT, Anyway?
A REIT, or a real estate investment trust, is a company that invests in income-producing commercial real estate. So, following that logic, if a REIT invests in apartments, and you invest in a REIT, you have direct ownership in the apartment community, right? Not so fast. There are some major differences between investing in REITs and investing in Real Estate Syndications. Let’s explore them!
8 Differences Between a REIT and a Real Estate Syndication
Here are the eight biggest differences between a REIT and a real estate syndication:
Number of assets
Ownership
Access to Invest
Control
Investment Minimums
Liquidity
Tax Benefits
Returns
Number Of Assets
REITs typically hold a portfolio of properties across multiple markets. Each REIT focuses on a certain asset class, such as senior care facilities, apartment buildings, office buildings or malls. This can be great for diversifying your portfolio.
On the flip side, most real estate syndications invest in a single property in a single market. You will know exactly where the property is, how many units it has, how the market is performing in that part of the country, all the financials, and what the business plan is.
So while there is not the same diversification, the property and location are cherry-picked and you can rest assure that you are investing in a high performing market in a building that has proved to be profitable. And while you don’t have the ability to diversify in any one deal, you can spread your money across multiple deals in different markets.
Ownership
When investing in a REIT, you buy shares in a company, just like you would buy shares in Apple or Google. You have no ownership in the underlying real estate but you own shares in the company that owns those assets.
When investing in a real estate syndication, (a group investment), you are investing directly in a specific property. So, you, along with the other general partners and passive investors, will own the entity (usually an LLC) that holds the asset. Thus, you have direct ownership.
Access To Invest
The majority of REITs are listed in major stock market exchanges, just like any other public stock. You can invest in REITs directly, or you can invest through mutual funds or exchange-traded funds. Because most REITs are publicly listed, they are easy to find and to invest in.
Have $50 to invest? You could probably invest in a REIT within the next ten minutes. Done and done.
Real estate syndications, on the other hand, can be more difficult to find, and the process to invest can involve a bit more time and effort. Many real estate syndications are under an SEC regulation that does not allow public advertising. As such, you would need to be connected with someone who has a deal you can invest in.
The start to finish the process of investing in a real estate syndication may take up to a few weeks. This includes time to review the investment opportunity, sign the legal documents, and send in your funds.
REITs are open to anyone with money, whereas many real estate syndications are only open to accredited investors, which can make it more difficult for non accredited investors to get involved. They may need to look a little harder to find opportunities that accept non-accredited investors.
Control In Choosing Assets
Traditionally we say that syndications offer limited control because you have a sponsorship team that is overseeing the property and will make most of the day to day to decisions. But in a REIT, you have even less control.
Witha REIT, you will have little knowledge or control over what asset is purchased or where. You can’t perform a risk analysis and will never get to see a business plan or fee schedule. You have no idea if the company is operating at peak performance to maximize returns.
With a syndication, you will have access to all the necessary information to decide whether or not you think it’s a good investment opportunity and you have the ability to “opt-out”. You will know who the sponsorship team is and you may have voting rights when it comes to critical changes to the business plan. You will have access to all of employee costs and management fees and you will be able to gauge the risk of the opportunity before buying in.
Investment Minimums
You can invest in a REIT with a very small amount of money. When buying a REIT, you are purchasing shares, some of which can be just a few dollars.
On the flip side, syndications typically have much higher investment minimums. The typical minimum investment is $50,000, but they can be as low as $20,000, or as high as $100,000 or more. So you need quite a bit more capital to invest in a real estate syndication.
Liquidity
This is another aspect in which REITs are superior. Just as when you invest in stocks, REITs keep your investment liquid. That means that at any time, you can buy or sell shares, and your money is not locked in for a set amount of time.
When you invest in a real estate syndication, you are investing directly in a real piece of property. Just like when you buy a home, you can’t buy and sell that with the click of a button. The same applies for real estate syndications. The business plan often includes holding the asset for a certain amount of time, during which your money would be illiquid.
So if you’re thinking of investing $50,000 but may need some of that in a couple of years when Junior goes off to college, probably best not to put that into a real estate syndication, where that money will be locked up for a certain period of time. If on the other hand, you are looking to grow your retirement nest egg or save for college that’s more than 5 yrs away, it could be a great opportunity.
Tax Benefits
One of the biggest benefits to investing in real estate is the tax benefits. When you invest directly in a property, as you would through a real estate syndication, you get the benefit of a variety of tax deductions, including depreciation (i.e., writing off the value of an asset over time). In some cases, particularly with accelerated depreciation, those tax benefits can be quite substantial.
In many syndication investments, the depreciation benefits alone are reason enough to invest. The depreciation benefits often surpass the cash flow, so when you do your taxes, it shows a loss on paper while you’re actually getting positive cash flow. Furthermore, you can use those paper losses to offset other income, like income from your job.
When you invest in a REIT, because you’re investing in the company and not directly in the real estate, the tax benefits are less exciting. You do get the benefits of depreciation, but those are factored in before you get your dividends, so you don’t get any tax breaks on top of that. In other words, the company gets the write-off, not you, so you can’t use that depreciation to offset any of your other income.
Further, any dividends from REITS are taxed as ordinary income, which can contribute to a bigger tax bill. There are ways to significantly reduce the amount of tax you pay on income from syndications. With an eQRP (a specific form of IRA used for investments), it’s possible to avoid taxes almost entirely. It’s something we can further discuss if you decide to invest in syndication with Vidente Capital.
Returns
Let me first say, that returns for an individual REIT or real estate syndication can vary wildly, depending on the asset, the people, and the timing.
That being said, when looking at historical data over the last forty years, total returns for exchange-tradedU.S. equity REITs averaged 12.87 percent per year. By comparison,stocks averaged 11.64 percent per year over that same period.
This is pretty good. This means that, on average, if you were to invest $100,000 in a REIT, you could expect somewhere around $12,870per year in dividends.
For the real estate syndications we offer our investors, though,we typically set our sights abit higher. When factoring in both cash flow and profits from the sale of the asset, our investments typically offer upwards of 20percent average annual returns.
If you were to invest in a real estate syndication with a hold period of five years and a 20 percent average annual return, you would essentially be making $20,000 per year for 5 years, or $100,000(this takes into account both cash flow and profits from the sale).
That means that you would double your money, from $100,000 to$200,000, over the course of those five years.
So, Which One Should You Invest In?
Well, there you have it, the seven biggest differences between a REIT and a real estate syndication:
Number of Assets
Ownership
Access to Invest
Investment Minimums
Liquidity
Tax Benefits
Returns
All in all, there’s no one best investment for everyone (but you knew I was going to say that, right?).
If I had $1,000 to invest and wanted to be able to access that money freely, I might invest it into a REIT. If I had a bit more to invest and wanted direct ownership and more tax benefits and could afford to have the money tied up for a longer period, I would be more interested in a real estate syndication.
Now that you know some of the biggest differences between a REIT and a real estate syndication, you can weigh the pros and cons against your personal investing goals and decide.
And remember, it doesn’t have to be one or the other. You might start in a REIT and then invest in a real estate syndication later on. Or you might dabble a bit in both to diversify. Either way, investing in real estate, whether directly or indirectly, is always a win in my book.