7 BIG Differences Between REITs And Real Estate Syndications

by | May 21, 2021 | 0 comments

If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Fixing toilet emergencies at 3 am isn’t appealing to most people, myself included. The mental load and physical commitments of being a landlord, even with a property management company in place, are just too much responsibility for most people to bear.

We owned rental real estate in a few places across the country with a reliable property management company for each. Nonetheless, maintenance costs, occupancy variations, and low margins caused us to reconsider. Luckily, we went straight from those to an eye-opening seminar about syndications and never questioned otherwise. 

However, most people do a little Googling – something along the lines of “how to make more in real estate” or “how to scale real estate investments.” The next thing they know, REITs pique their interest. 

Real Estate Investment Trusts are available online, at the click of your mouse, just like stocks. They don’t require you to be a landlord and are marketed as “great” real estate investments.  Why would you pick one over the other?

Defining REITS And Debunking Myths

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.

There are seven substantial differences between REITs and real estate syndications, and every one of them affects your wealth-building strategy in one way or another, so let’s dissect them one by one.

 

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. 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. Your opportunity for diversification lies in your ability to invest in any city, asset type, or class across the country. 

 

Difference #2: Ownership

When investing in a REIT, you purchase shares in the company that owns the real estate assets. You don’t own any portion of the real estate itself. When you buy REITs, you’re purchasing stock in the holding corporation. 

When you invest in a real estate syndication, you and others directly purchase a specific property through the entity (usually an LLC) that holds the asset. As a passive investor, you’re contributing capital directly to the purchase (and likely improvement) of a single, large commercial asset which gives you claim to all the benefits of owning real estate. 

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. Just like you’d pick funds or stocks inside your retirement or brokerage account, you can (and might already!) own REITs.

On the other hand, real estate syndications are often under an SEC regulation that disallows public advertising, making 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 syndication business plans often define holding the asset for a certain amount of time (usually five years or more) and lock in your capital.

 

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 is depreciation (i.e., writing off the value of an asset over time).

Often, 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, you’re investing in the company and not directly in the real estate. You get depreciation benefits that may be 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, contributing 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 excellent 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 five-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 after five years.

 

Should You Invest In A REIT Or A Real Estate Syndication?

All in all, there’s no one best investment for everyone (but you knew that, right?).

Now that you know the differences, pros, and cons of each, you can make an informed decision. Keep in mind; it’s not necessarily one or the other. Maybe you own some REITs among stocks and mutual funds inside your retirement account, but you invest money outside of that into syndications because you’re focused on creating cash flow that will allow you to work when you want. Each person’s situation is different, and your ability to make the best choices always circles back to your investing goals.

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, want to talk to the sponsors directly, and want more tax benefits, then a real estate syndication may be a better fit.

And remember, you can be flexible. 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.

 

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