8 Differences Between Real Estate Syndications and REITs
If you’ve decided that incorporating real estate in your investment portfolio is a no-brainer and realize that you don’t have the time or desire to be an active investor (another great choice!), then your next move is to decide what passive real estate vehicle makes the most sense for your personal situation. The two main options are: Real Estate Syndications and Real Estate Investment Trusts (REITs).
For investors that aren’t already familiar with Real Estate Syndications, it involves investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor. For additional details, check out our previous blog post that explores the topic further.
A Real Estate Investment Trust (REIT) on the other hand is a publicly traded company (similar to a stock or mutual fund) that owns and operates numerous commercial real estate properties.
While these two investment vehicles may seem similar, there are some key differences that you as the investor should be aware of before deciding which one makes the most sense for you:
1. Ownership Structure
When you invest in REITs, you are buying shares in a publicly traded company (i.e. Google or Apple) that owns commercial real estate assets. This means that you do not directly own the underlying real estate properties.
In contrast, when you invest in a real estate syndication, you are pooling together your investment funds to purchase direct ownership in a real estate property which is set up via an LLC.
2. Asset Selection
Investing in a REIT allows an investor to access a diversified number of properties with a single investment. The investor is able to select a REIT that operates in a specific real estate sector, such as shopping malls, office buildings, apartments, etc., but does not have the ability to select the specific property or location.
A real estate syndication gives investors the ability to select a specific property which gives investors the ability to perform due diligence on the business plan, financials, sponsor team and local market before deciding to invest.
3. Finding the Investment
REITs can easily be found by investors as they trade on public exchanges, similar to any other stock, bond or mutual fund.
Real estate syndications on the other hand require more effort to find as they are not publicly traded and cannot be advertised per SEC regulations. In order to invest in a syndication, you need to be connected with someone who has access to these deals. This is where our company can help as we work with numerous syndication sponsors across the U.S. and provide these opportunities to our investors.
4. Investment Minimums
Similar to buying a stock or bond, REITs can be purchased with a very small amount of money, which makes it a great option for younger investors that are just getting started with real estate.
Minimum investments in real estate syndications vary, however, they are much higher than REITs as the typical minimum ranges from $25,000 - $50,000.
5. Correlation to the Stock Market
Because REITs trade on public exchanges, they follow the stock and bond markets very closely. While this is great when the market is up, the value of your REIT can be dragged down by the stock market even just as quickly. This means you aren’t achieving adequate portfolio diversification as your “eggs are in one basket”.
On the other hand, real estate is owned on the private market which means the daily swings of the public market do not have an impact. This allows investors to weather rocky market conditions and protect their portfolios from a significant collapse.
REITs certainly have the advantage here as you can sell your investment at any time, just as you would a stock or a bond.
Real estate syndications are illiquid, meaning you cannot sell your investment until the property has been sold, which is normally between 3-7 years. In some ways, this can be a benefit for investors who are prone to make incorrect, emotional selling decisions as they are forced into a long-term buy and hold strategy.
7. Tax Benefits
One of the main reasons investors want to invest in real estate is the potential tax benefits. Unfortunately for REIT investors, the income you receive from your investment is taxed as ordinary income (similar to your normal paycheck), which leaves investors with a larger tax bill than if they didn’t invest in a REIT.
This is where real estate syndications significantly outperform REITs as there are various tax write-offs such as depreciation, mortgage interest, and other related expenses that can help investors offset their investment gains. In fact, many investors can show a “paper loss”, while being cash flow positive, which can lead to real estate investors completely eliminating the taxes on their real estate income. If that wasn’t enough, you may also be able to use those paper losses to offset the income from your paycheck, further reducing your taxes each year.
8. Appreciation Potential
While REITs do provide investors with passive income through dividends, they do not provide investors with appreciation when the underlying properties become more valuable. This is due to the structure of the REIT which by law must pay 90% of income back to investors, leaving very little to be reinvested in value-add improvements.
On the other hand, real estate syndications are structured to produce both cash flow and appreciation. As you are collecting the cash flow from the monthly rents, your syndication sponsor team is busy making value-add improvements to the property. These improvements increase the monthly rental prices and value of the property which leads to the investor receiving their initial investment plus their portion of higher property value when the investment is sold.
If you’re ready to start exploring investing in no-hassle, hands-offreal estatesyndications definitely reach out!