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. It’s one of the primary reasons we are selling some of our personally owned smaller assets.
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 buy 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?
Not really.
Let’s explore 8 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 greater diversification for investors. REITs are available for apartment buildings, shopping malls, office buildings, elderly care, and many other asset types.
On the flip side, with real estate syndications, you invest in a single property in a single market. You know the exact location, number of units, 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 an entity (usually an LLC) that holds the asset.
Difference #3: Access to Invest
Most REITs are listed on major stock exchanges, making them easy for online direct investment through mutual funds or exchange-traded funds (ETFs).
On the other hand, real estate syndications are often under SEC regulations that disallow public advertising, making them difficult to find without knowing the sponsor or other passive investors. Another hurdle is that many syndications are only open to accredited investors.
Once you have obtained a connection, become accredited, and found a deal, it may take several weeks to review the investment opportunity, sign the legal documents, send in your funds and close the deal.
Difference #4: Investment Minimums
When you invest in a REIT, you purchase shares on the public exchange, some of which can be just a few dollars per share. Thus, the monetary barrier to entry is low.
Real estate syndication investments require significantly higher capital than REITs. The average syndication investment minimum is around $50,000 though they can range from $10,000 to greater than $100,000.
Difference #5: Liquidity
At any time, you can buy or sell shares of your REIT. If you need liquidity, you can log in to your account, press sell, and the cash appears in your account.
Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (usually five years), during which your money is locked in.
Difference #6: Tax Benefits
Tax savings are among the most significant benefits of investing in syndications versus REITs. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).
Often, the depreciation benefits surpass the cash flow allowing a tax loss on paper despite having positive cash flow. Sometimes, these paper losses can offset other forms of income you have received.
Any losses recognized when investing in a REIT will be factored in before the dividend payout. There are no additional tax breaks, and you can not use the depreciation to offset other income streams.
Unfortunately, dividends are taxed as ordinary income, which can contribute to a larger rather than smaller tax bill.
Difference #7: Returns
While returns for real estate investments can vary wildly, the forty-year historical data of exchange-traded U.S. equity REITs reflects an average annual return of 12.87%. By comparison, stocks averaged 11.64 percent per year over that same period.
At GenWealth Capital Group, we often project a 13-17% average annual return with some opportunities exceeding a 20+% average annual returns over the hold period.
Difference #8: Access to Sponsorship Team
Think of a REIT as a mutual fund. The average investor will not be able to phone the REIT fund manager to inquire about performance, proformas, or changes in business plans.
On the other hand, syndications should allow more direct access to the individuals managing the asset. At GenWealth Capital Group, we encourage investors to discuss the purchase with our team before investing and to reach out with questions during the hold period.
Conclusion
So, which one should you invest in? There is no one best investment for everyone.
If you have $1,000 to invest and want to access that money freely, you may look into REITs. A real estate syndication may be a better fit if you have more available capital and want direct ownership and significant tax benefits.
Remember, it doesn’t have to be one or the other. You might begin with REITs and then migrate toward real estate syndications. Or you might dabble in both to diversify—either way, investing in real estate is progress toward diversifying your portfolio.