Have you ever considered investing in real estate but dismissed the idea because you didn’t want to be the stereotypical landlord? Nobody wants to buy a piece of property with hopes of achieving passive income, only to discover they’re stuck with excess unpleasantries, more responsibility than they bargained for, and much less income than expected.
Many investors turn to real estate investment trusts (REIT), which are similar to stocks in that they are easy to obtain.
REIT, What is That?
You might assume that you are buying shares of commercial properties when you invest in a REIT, similar to how you’d imagine directly investing in the assets.
That can’t be further from the truth.
Let’s examine the seven greatest differences between REITs and real estate syndications:
Difference #1: Assets Under Ownership
A REIT is a corporation that owns a portfolio of properties in several areas within an asset class, which can provide investors with instant diversification. Apartment buildings, shopping malls, office buildings, elder care, and other specific property-type REITs are all easily accessible online through large brokerages, just like stocks.
Real estate syndications, on the other hand, allow you to invest in a single property in a single market. You know the particular location, the number of units, the specific financials for that property, and the investment’s business plan.
Difference #2: What Do You Really Own?
When you buy shares in a REIT, you’re buying stock in the corporation that owns the real estate assets, not a portion of the real estate properties. If the corporation does well, your REIT value increases, and if not, your REIT value decreases, regardless of what the real estate assets are doing.
When you invest in a real estate syndication, you and other investors contribute directly to the acquisition of a specific property through the organization that holds the asset (typically an LLC). Your profit distributions are 100% dependent upon the real estate market and the execution of the business plan by the professional team in place.
Difference #3: Access to Opportunities
Most REITs are traded on major stock exchanges, and you may buy them directly, through mutual funds, or through exchange-traded funds online in a matter of minutes.
Real estate syndications, on the other hand, are generally under an SEC regulation that forbids public advertising, making them tough to discover without knowing the sponsor or other passive investors. Another issue is that many syndications are restricted to investors with a specific level of wealth, accredited investors.
Even if you’ve got a connection, become certified, and found a bargain, it might take weeks to examine the investment opportunity, sign the legal documents, and submit your cash.
Difference #4: Capital Requirement
When you buy a REIT, you’re buying stock on the public market, which can range from a few dollars to hundreds of dollars per share. As a result, the financial barrier to entry is quite low.
Syndications, on the other hand, require much larger initial expenditures, typically $50,000 or more. Real estate syndication investments require substantially more capital than REITs, even though they might vary from $10,000 to $100,000 or more.
Difference #5: Cash Liquidity
Your real estate investment portfolio can be sold at any time, and you may withdraw your funds. You can trade your REIT shares just like you would do with regular stocks.
Syndications are more complicated and typically include a business plan that specifies how long you will keep the property (often 5 years or longer), during which your money is restricted.
Difference #6: Taxes and Depreciation
One of the most significant advantages of real estate syndications over REITs is the long-term tax savings. When you invest directly in real estate (including real estate syndications), you can take advantage of a number of tax benefits, the most important of which is depreciation (i.e., writing off the value of an asset over time).
Frequently, the cash flow benefits outweigh the depreciation benefits. So, while you may have a loss on paper, your cash flow is positive. In some cases, these on paper losses can be used to offset other sources of income, such as other gains or a salary from a job.
You do have depreciation benefits when you buy in a REIT because you’re investing in the company rather than the real estate, and all depreciation is factored in before dividend disbursements. There are no additional tax benefits, and the depreciation cannot be used to offset any other income.
Dividends are unfortunately taxed as regular income, which can result in a greater tax burden rather than a lesser one.
Difference #7: Revenue
While the revenue on any investment in real property can differ greatly, the historical information in the last 40 years represents, on average, 12.87% of total revenue per year on US equity REITs traded in the exchange. In comparison, throughout the same period, stocks averaged 11.64% annually.
On average, you may expect roughly $ 12,870 in dividends per year, which are high ROI, if you invested $100,000 in a REIT.
Real estate syndications can provide an average yearly revenue of roughly 20%, considering cash flow and earnings from the asset’s sale.
For example, a $100,000 syndication transaction with a 5-year hold period and a 20% average annual return can produce an average of $20,000 every year for 5 years, or $100,000 (this includes both cash flow and profits upon the sale), implying that your money can double in value.
Which Is The Better Investment? REITs vs Real Estate Syndications
So, in which one are you supposed to invest?
Well, there is not one optimal investment for everyone, across the board.
You should check into REITs if you have $1,000 to invest and want unfettered access to that money. Real-estate syndications are a better solution if you want direct ownership, want to have greater tax benefits, and talk to sponsors directly.
Overall, it doesn’t need to be one or the other. And remember, you might start with REITs and move to syndications later. Or you could divide the capital you have to invest into both types of investments – instantly achieving some level of diversification. In any case, directly or indirectly, investment in real estate is a step forward.
When you’re ready to explore real estate syndication deals and connect with us about potential investment opportunities, you’re invited to join the Great Venture Investors’ Club. Inside, together, we’ll talk about your investment goals, explore deals that align with your journey, and enjoy the community of real estate investors in pursuit of a more freedom-filled life, just like you.