Breaking it Down: REITs vs. Real Estate Syndications – Key Differences to Know
So, you are interested in real estate investing and you’re not know where to start. Maybe you heard about rental properties but you don’t want to be a landlord. We don’t blame you. Many individuals don’t want to get a call at 3 am about a flooding toilet or broken AC. Fortunately, there are other avenues that you can go down. Many investors go down the route of real estate syndication or a real estate investment trust (REIT). These are very accessible to investors. In this article, we will break it Down: REITs vs. Real Estate Syndications.
What is a Real Estate Syndication?
Real estate syndications are partnerships between a group of investors who come together to pool their funds in order to purchase a single, large real estate investment.
What is a REIT?
REIT stands for a “real estate investment trust”. This is a company that owns or finances income-producing real estate or related assets across a range of sectors.
Real estate syndications and real estate investment trust (REITs) are a company that owns financial income-producing real estate or related assets across a wide range of sectors.
Real estate syndications and REITs are two commonly used investment options in the world of real estate.
Although both offer the opportunity to invest in real estate, there are some crucial differences. These are six key differences between real estate syndications and REITs;
- The structure of ownership
- Accessibility
- Investment minimums
- Liquidity
- Tax benefits
- Potential returns
It is crucial for investors to understand the differences in order to make the right decisions that are based on their investment goals and risk tolerance. We will show you whether real estate syndications or REITs are right for you.
Difference #1: Ownership Structure
Through ownership structure, you buy shares in the business that controls the real estate assets when you invest in a REIT. This is similar to buying shares in a company on the stock market.
When you are in a real estate syndication, you become part of the entity as a limited partner or LP. In a syndication, investors pool funds directly into the asset to acquire a property through a holding company. This will often be an LLC. By participating, investors can diversify their portfolios and gain access to larger, more lucrative real estate deals.This route will allow for direct funding of the property and the opportunity to share ownership of the properties as well as the risks and rewards with other investors.
Difference #2: Accessibility
Most REITs are listed on the stock exchange, which makes it quick and simple to invest in them directly online. This is through mutual funds, or through exchange-traded funds.
On the other hand, real estate syndications can be more difficult to access depending on the classification. Syndications are subject to SEC regulations and in some cases, such as in Reg D 506b offerings, public advertising is forbidden. This can make them challenging to locate with challenging to locate without knowing the sponsor or other passive investors. If the offering is a Reg D 506c offering, the syndication can be publicly advertised. However, these investments are only available to accredited investors, so you have to meet that criteria, which is a barrier for some.
Difference #3 Investment Minimums
When you invest in a REIT, you are buying publically traded shares, some of which may be only cost a few dollars. This is good as there isn’t a huge barrier to entry.
However, syndications have investment minimums of $25,000 to $50,000 or more. The minimum investment is almost always dependant on the offering and should be stated in the subscription documents.
Difference #4: Liquidy
REITs (real estate investment trusts) are a popular way to invest in real estate. It’s easy for investors to get into because they can invest in real estate without owning physical property. They offer liquidity and allow investors to buy and sell shares at any time. This provides flexibility and convenience. Your money is liquid in REITs.
With real estate syndications, it is good to remember that the business plan often outlines a predetermined period of time for which the asset will be retained. This time period is typically 5 years, on average, and can be more or less, during which an investors money is “locked in”. Investors don’t have access to their funds until the syndication.
Investing in a real estate syndication can be a very lucrative opportunity for individuals who are looking to diversify their portfolios. However, it’s important to carefully review the business plan and understand the length of time for which your money will be tied up. Even though this can be a disadvantage for some investors, it can also be an advantage for some investors. This is especially true for when/if investing through a self-directed retirement vehicle or account. It is important to note that long-term commitments can also lead to significant financial gains. It is crucial to weigh the pros and cons before deciding whether or not to invest in a real estate syndication.
Difference #5: Tax Benefits
One of the biggest benefits of investing in syndication as opposed to REITs is tax benefits. The biggest tax benefit of investing directly into real estate (including real estate syndications) is depreciation. This is the process of deducting the value of an asset over time.
The advantages of depreciation frequently overweight the cashflow. Even when you have consistent cash flow, your financial statements may indicate a loss. Other income (such as that from an employer) may be reduced by such paper losses.
This does not even take into consideration any cost segregation studies and/or bonus depreciation with can maximize you paper “losses”.
You might have depreciation advantages when you buy in an REIT. This is because you are investing in the business rather than the actual property. But they are taken into account before dividend payments are made. Additionally, there are no tax benefits. Also, the depreciation cannot be used to reduce any other income.
Unfortunately, for REITs, dividends are treated as regular income for tax purposes. Which may result in a larger tax burden rather than a lesser one.
Difference #6: Potential Returns
Although the returns on any real estate investment can vary greatly, historical data over the past forty years shows that total returns for exchange-traded US equity REITs have averaged 12.87 percent annually. Comparatively, throughout the same time span, stock prices averaged 11.64 percent annually.
This implies that, on average, if you invested $100,000 in a REIT, you might expect to get $12,870 in dividends a year, which is a fantastic return on investment.
According to a report by CrowdStreet, commercial real estate syndications have delivered an average annual return of approximately 16.3% over the past ten years.
In this scenario, if you invested $100,000 in a real estate syndication transaction with a 5-year hold period and a 16% average annual return, you may expect $16,000 every year for 5 years, or $80,000 (this includes cash flow and proceeds/gains), meaning your money will 1.8x in value during that time and you will have $180K within the five-year hold period.
Conclusion
Which should you invest in, then? Overall, there isn’t a single investment that is the best for everyone (but that’s a no-brainer, right?).
You could consider REITs if you have $1,000 to invest and want access to that money at any point in time. A real estate syndicate may be a better option if you have a little more cash on hand, prefer direct ownership, and want greater tax advantages.
Investing in real estate can take different forms, and it’s not necessarily an either/or decision. For example, you could begin with investing in real estate investment trusts (REITs) and later move to real estate syndications. Alternatively, you could diversify your portfolio by investing in both. Regardless of the approach you choose, investing in real estate can be a smart financial move that will help you grow your wealth and help you leave a legacy.
Deciding Which Plan Is Best For You
Finding the ideal investing strategy for you will be much more straightforward if you have a clear idea of where you’re headed and what you want to achieve, which is why we always start with your goals in the driver’s seat. Only after those goals are identified, will you be able to decide whether to match your real estate investments with a gains strategy, a cash flow plan, or a combination of both.
At Ohana Investment Partners, we believe investing in real estate syndications with cash flow and appreciation built into each deal is the ideal approach to simultaneously grow wealth and independence.