If real estate investing seems interesting to you, but you'd rather avoid becoming a landlord, you're not alone. Fixing toilet emergencies at 4 am isn't appealing to most people. Shocker.
The next logical step that many investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks.
What is a REIT, anyway?
When investing in a REIT, you're buying stock in a company that invests in commercial real estate. So, if you invest in an apartment REIT, it's like you're investing directly in an apartment building, right?
Let's explore the 7 Huge, Easy to Understand, 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 excellent diversification for investors. Individual 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. You may invest in them directly, through mutual funds or exchange-traded funds, quickly and easily online.
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 syndications are accompanied by a business plan. The plan often defines holding the asset for a certain amount of time (usually 5 years or more), during which your money is locked in.
Difference #6: Tax Benefits
One of the most significant benefits of investing in REITs versus real estate syndications 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, because you're investing in the company and not directly in the real estate, you get depreciation benefits. Still, 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, contributing to a bigger, rather than smaller, tax bill.
Difference #7: Returns
Returns for any real estate investment can vary wildly. Yet, 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.
In other words, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is an excellent ROI.
However, real estate syndications between cash flow and profits from the asset's sale can offer around 20 percent average annual returns.
For 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 means, taking into account both cash flow and profits from the sale, your money doubles over those five years.
So, in which one should you invest?
All in all, there's no one best investment for everyone (but you knew that, right?).
If you have $1,000 to invest and want to freely access that money, you may look into REITs. If you have a bit more available and want direct ownership and more tax benefits, 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.