If you’re interested in investing in real estate, but the role of landlord is something you’d like to avoid, you’re definitely not alone. In fact, becoming an active investor, or landlord is a role that doesn’t appeal to most people once they realize what is really involved.
For many investors who stumble upon the world of real estate investing, the easiest step is to start by investing in a REIT, or a real estate investment trust. A REIT is easily accessible through any major online brokerage and the process is very similar to investing in stocks.
So, why invest in a commercial real estate syndication over a REIT?
There are various benefits to each, they aren’t mutually exclusive of each other, and your choice should depend heavily on your private, personal, and financial goals.
Definition of a REIT
First, what is a real estate investment trust anyway? When you invest in a REIT, you’re buying stock in a company that invests in commercial real estate properties. Most people assume that if you invest in an apartment REIT, it’s the same as directly investing in an apartment building, but that’s not really the case.
Let’s explore the biggest differences between REITs and real estate syndications so that you can confidently select the real estate investment strategy that’s best for you and the lifestyle you desire for your family.
#1 – Number of Properties
Since a REIT is an investment in a company that holds a portfolio of properties across multiple markets in an asset class, investors have a great opportunity for diversification. In fact, you can invest in separate REITs for office buildings, apartment complexes, shopping centers, assisted living facilities for the elderly, and more.
With real estate syndications, however, you invest in a single property in a single market. You have all the details specific to the property, including the exact location, the number of units, the financials, as well as the unique business plan for your investment.
#2 – Ownership of the Asset
As an investor in a REIT, you’re purchasing shares in the company that owns the commercial real estate properties. The company can buy or sell real estate at any time and adjust which properties are included in your REIT portfolio.
As a passive investor in a real estate syndication, you and a group of other investors contribute directly to the purchase of a specific investment property through the entity that holds the asset. In a syndication deal, you invest alongside many general and limited partners, and the asset is usually held in an LLC or an LP.
#3 – Accessibility of the Investment
Most REITs are incredibly easy to access since they’re listed on major stock exchanges. You have the option to invest in them directly, through mutual funds, or via exchange-traded funds. You can buy or sell shares quickly – during your lunch break or while in line at Starbucks, for example.
Real estate syndications, on the other hand, are more difficult to find because they’re often under an SEC regulation that disallows public advertising. In order to find real estate syndication opportunities, you must connect with a sponsor or other passive investors. Another challenging aspect of syndications is that many deals are only open to accredited investors.
Investing in a real estate syndication may take up to several weeks to finalize. Even once you have obtained a connection, become an accredited investor, and found a deal, you’ll still have to allow ample time to review the investment opportunity, sign the legal documents, and send in your funds.
#4 – Required Minimum Investment
To invest in a REIT, the monetary barrier to entry is very low. Because you’re purchasing shares on the public exchange, you can invest in some REITs for as little as a few dollars. REITs can be a great way to get started in real estate since you can invest small amounts and build up your capital as you push to the next level.
Investing in a syndication deal requires significantly more capital than investing in a REIT but potentially less than if you were to buy a small residential rental on your own. With real estate syndications, the required minimum investments are often $50,000 or more.
#5 – Liquidity of Your Money
Similar to investing in the stock market, when you invest in a REIT, you can buy or sell shares anytime. The capital you have invested in a REIT is liquid which means there’s no required length of time to hold your REIT shares before selling again.
With real estate syndications, however, your money is locked in and unavailable to you during the lifecycle of the deal. Syndication deals are accompanied by a business plan that usually outlines holding the property for a certain amount of time, often 5 years or more.
#6 – Tax Benefits
One of the biggest differences between real estate syndications and REITs is tax savings. As a passive investor in a real estate syndication, you’re investing directly in a property, giving you a variety of tax advantages. The primary tax benefit of investing in a syndication deal is depreciation, or the opportunity to write off the value of an asset over time.
In many cases, the depreciation benefits surpass the cash flow. On paper, you may show a loss but have positive cash flow. Those paper losses can offset your other income, like earned income from a W-2 employer.
When you invest in a REIT, there are no real tax advantages. Since you’re investing in the company and not directly in the real estate property, you do get depreciation benefits, but those are factored in before dividend payouts. On top of that, there are no additional tax breaks and you can’t use that depreciation to offset any of your other income.
It should also be noted that dividends are taxed as ordinary income. Which, unfortunately, in the end, contributes to a larger tax bill rather than a smaller one.
#7 – Projected Returns
As you know, the returns for any real estate investment can vary a great deal. If we take a look at historical data compiled over the last forty years, we see that exchange-traded U.S. equity REITs on average yield 12.87 percent per year in total returns. Stocks, on the other hand, averaged 11.64 percent per year over that same period.
To summarize, this means that on average, if you invested $100,000 in a REIT, you could expect a great ROI of somewhere around $12,870 per year in dividends.
With real estate syndications, when you factor in the cash flow and the profits from the sale of the asset, you can expect around 20 percent average annual returns.
To illustrate the point, if you invest $100,000 in a syndication deal with a 5-year hold time and a 20 percent average annual return you could make $20,000 per year for 5 years, or $100,000. Again, this takes into account both cash flow and profits from the sale, which means your money doubles over those five years.
Is a REIT or a Real Estate Syndication the Best Fit for You?
If you’re ready to passively invest in real estate, REITs and real estate syndication deals are both great options to help you get started. The only question is which one should you invest in?
Unfortunately, there’s no one cookie-cutter investment that’s a great fit for everyone.
If you don’t have much capital to invest and want to access your money freely, REITs may be a great fit for you. Alternatively, if you have a bit more capital available and want direct ownership of your assets, a real estate syndication may be a better fit.
Real estate syndication investments also provide you, even as a limited partner/ passive investor, access to talk with sponsors directly, tax benefits, and usually the option to earn a share of the profits upon the sale of the property at the end of the hold period.
Remember though, you don’t have to choose just one or the other. You might start slowly by investing in REITs and then move toward real estate syndications as you have more capital available. Oftentimes, investors dabble in both as a way to diversify their portfolios. Regardless of which investment vehicle you choose, investing in real estate is a reliable way to start building your wealth and meeting your personal goals.