Many real estate investors just want to put their capital into real estate investment opportunities and collect passive income. They don’t have any desire to be a landlord. Go figure.
So, it’s not unusual to see investors turn to real estate investment trusts (REITs) as an investment option, which they perceive to be a way to invest in real estate without much risk. Investing in REITs is a fairly simple process similar to investing in the stock market.
What is a REIT?
When investing in a REIT, you own shares of a company that invests in commercial real estate. To be clear, you are not investing directly in the commercial property itself; you are investing in a company that has invested in the commercial property. So, there are some big differences between REITs and private real estate syndication.
What Are The Differences Between REITs and Private Real Estate Syndications?
1.) Number of Assets That These Investment Vehicles Hold
A REIT is a company that holds an entire portfolio of different properties in a particular asset class. The assets are acquired in multiple markets which can offer solid diversification for the investors. There are different types of REITs. REITs invest in one particular asset class, but each REIT can be invested in such asset classes as apartment buildings, warehouses, medical facilities, hotels, office buildings, shopping malls, cell towers, etc.
With REITs, you, as the investor, don’t know the exact assets that you are invested in because, again, you are not technically invested in the real estate itself only the company.
In contrast, with multifamily syndications, a group of investors typically invest in a single property like a multifamily apartment community. You, as the investor, know everything there is to know about your investment property in a syndication deal because you own a portion of the real estate itself. You will know which multifamily property it is, where it is located, what the real estate market is like, how many units the property has, and all of the financial data pertaining to your investment.
Real estate syndications are much more transparent as far as your investment goes. You know exactly which asset in which market you are invested in, unlike REIT investing.
2.) What Is The Difference Between The Ownership Structures?
One of the major differences between a REIT and a multifamily syndication investment is the ownership structure. When investing in a REIT, you are actually purchasing shares in the company. The company owns the real estate assets, REIT investors don’t own the underlying real estate.
When you invest in a real estate syndication, you own a portion of real property – it’s direct property syndication. What that means is that a group of individual investors pool their capital to purchase the asset by way of an entity structure (usually a limited partnership structure or a limited liability company structure). They become limited partners and have direct ownership in the asset. This structure creates more tax advantages for the passive investor, which we will cover in a moment.
3.) How Do You Invest In Each Type Of Investment?
You can invest very easily in listed public REITs or mutual funds or ETF’s that invest in REITs.
By contrast, syndications, are under Security and Exchange Commission – SEC regulations – and most often disallow public advertising depending on the offering. So, it can be more difficult for investors to know where to find these opportunities. If you are interested in learning more about syndications, you can reach out to us at PCRP Group, and we can help you.
Additionally, unlike REITs, you must be an accredited investor to invest in most of these real estate syndication opportunities.
4.) What Is The Minimum Investment For Each Investment Type?
You can invest in REITs through major stock exchanges. The amount of capital you will need to invest typically ranges from $1,000 to $25,000. The barrier to entry is lower, and in some cases, you can invest much less.
On the other hand, with real estate syndications, investment minimums are much higher. Typically you will need to have a minimum investment of $50,000 to invest in most syndications. Additionally, it’s not uncommon to see $75,000 and $100,000 minimums as well.
5.) What Is The Difference In Liquidity?
This is one of the key differences between the two investment types: liquidity. When you invest in REITs you have more liquidity. Again, investing in REITs is like investing in stocks or mutual funds, so the ability to purchase or sell your shares is easily administered.
By contrast, with a syndication deal, you are actually invested in the real estate asset itself. The investment goals of the syndication are designed to execute a comprehensive business plan to increase the value of the property over time with the ultimate objective of generating higher returns for the investors.
So, you can expect to have your capital invested for the entire term of the hold period – typically 5 years. Your capital is not liquid with a real estate syndication until the property is sold or refinanced.
6.) What Is The Difference in Tax Benefits?
One of the biggest differences between these two types of investments is the tax advantages that you can receive with syndications that you CANNOT receive with REITs. Real estate investing in general, real estate syndications being no exception, allows you to have enormous tax benefits that can offset the potential tax consequences from your passive income distributions.
This is because real estate has a depreciation schedule that allows for write-offs that can offset the income generated by the property. The depreciation often creates a paper loss even if the property has generated a profit. A paper loss can offset the investor’s income. With a passive real estate syndication investment opportunity, you can take advantage of those tax benefits that you would not be able to capitalize on when you invest in a REIT.
When you invest in a company such as you do when you invest in a REIT, you are NOT able to use the depreciation to offset your dividends, which can result in you paying more taxes than you otherwise would in a real estate syndication. Dividends from REITs are taxed as ordinary income, which can be less favorable to you as the investor.
Every individual’s tax situation is different, so you’ll want to consult with your CPA to review how each of these investments would affect you.
7.) How Do The Returns Differ With Each Of These Investments?
The average annual return for the last 25 years for residential exchange-traded REITs in the United States, has been 13.7%, so if you were to have invested 100,000 in a residential REIT, you could have expected to receive approximately $13,700 a year in dividends. Not a bad ROI, right?
But let’s take a look at the returns with private real estate syndication in multifamily assets. When you invest in private syndications you can expect upwards of a 20% annual return depending on the syndication. So, in that example, you could potentially earn $20,000 a year or more from a real estate syndication investment. This takes into consideration the total returns – the positive cash flow distributions you receive each quarter and the portion of the profits you receive from the sale of the asset.
So, over a 5-year period, for example, passive investors investing in a real estate syndication could potentially double their money.
And remember, there are the tax deductions you can receive with syndications that you do not receive with REITs that can make a substantial difference to your taxable income when you compare both investment strategies. Again, you would want to consult with your tax professional.
So, which is the better investment?
A great way potential investors can make more comprehensive investment decisions is by simply conducting their own due diligence on how both of these investment vehicles may improve upon their investment portfolio.
At the end of the day, there is no single investment that is best for everyone.
If you have less to invest and care about liquidity, then REITs may be a better fit for you. If you want potentially better returns, direct real estate ownership for better tax breaks, and you’re okay having your money tied up for 5 years or so, then you may want to explore multifamily real estate syndications more in-depth.
In either circumstance, having some type of real estate portfolio is one of the best ways to diversify your investment portfolio and capitalize on solid returns for your overall investment strategy.
We hope this has helped you to learn more about how to Earn Passively & Live Abundantly! Until next time….
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