If the prospect of being a landlord doesn’t appeal to you (fixing toilet emergencies at 3 am isn’t for everyone), you’re not alone. Many investors turn to real estate investment trusts (REITs) as a more accessible alternative, similar to investing in stocks. In this article, we’ll explore the seven significant differences between REITs and real estate syndications.
#1: Number of Assets
REIT: A REIT holds a diverse portfolio of properties across various markets within an asset class. This diversification spans apartment buildings, shopping malls, office spaces, elderly care facilities, and more.
Real Estate Syndication: In a real estate syndication, you invest in a single property in a specific market. This offers a more focused approach, providing detailed knowledge about the location, financials, and business plan for your investment.
#2: Ownership
REIT: Investors in a REIT purchase shares in the company that owns the real estate assets. It’s an indirect form of ownership.
Real Estate Syndication: In real estate syndications, investors contribute directly to the purchase of a specific property through the entity (usually an LLC) holding the asset. It offers a more direct form of ownership.
#3: Access to Invest
REIT: REITs are usually listed on major stock exchanges, making them easily accessible through direct investments, mutual funds, or exchange-traded funds online.
Real Estate Syndication: Real estate syndications often operate under SEC regulations, limiting public advertising. They are typically discovered through personal networks or known sponsors. Many syndications are open only to accredited investors.
#4: Investment Minimums
REIT: Investing in REITs requires lower capital as shares on the public exchange can be relatively inexpensive.
Real Estate Syndication: Real estate syndications have higher minimum investments, often ranging from $50,000 to $100,000. This makes them less accessible for investors with limited capital.
#5: Liquidity
REIT: Shares of a REIT can be bought or sold at any time, providing high liquidity.
Real Estate Syndication: Real estate syndications typically have a defined holding period, often five years or more, limiting liquidity during that period.
#6: Tax Benefits
REIT: Investing in REITs provides fewer tax benefits. Depreciation benefits are factored in before dividend payouts, and dividends are taxed as ordinary income.
Real Estate Syndication: Direct property investment, including syndications, offers various tax deductions, with depreciation being a significant benefit. Paper losses from depreciation can offset other income.
#7: Returns
Historical data over the last forty years indicates an average of 12.87 percent per year total returns for U.S. equity REITs. Real estate syndications, on the other hand, can offer around 20 percent average annual returns.
As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may yield $100,000 in profits, effectively doubling the investment over five years.
Conclusion
Choosing between REITs and real estate syndications depends on individual preferences and financial capacities. REITs may suit those with lower capital looking for easy access, while real estate syndications offer direct ownership and potentially higher returns for those with more significant capital. Both avenues contribute to forward progress in real estate investing.
