Real estate syndications and REITs are both real estate investment opportunities, but they operate very differently when it comes to investing.
If you’re like a lot of investors, you’ve already done the research and you know that investing in real estate might be the best next step. It’s easy to spend a lot of hours only to end up overwhelmed with too much information:
- How to invest in real estate
- How to be smart about investing in real estate
- What is a real estate syndication and how does it work?
- What are REITs (and do I need one)?
This article breaks it down so let’s get to it!
Here are the big takeaways that highlight the differences between Real Estate Syndications vs. REITs (Real Estate Investment Trusts)
5 BIG DIFFERENCES between Real Estate Syndications vs. REITs
1. Real Estate Syndications vs. REITs — assets and management structure.
REIT: Real Estate Investment Trust
A Real Estate Investment Trust is an investment opportunity offered through a corporate entity. REITs are structured as a corporation that invests in commercial real estate properties for the purposes of generating income. The corporation creates an investment fund that expands across different real estate markets. For example: shopping centers, office complexes, apartment buildings.
REITs invest in multiple properties to build a real estate portfolio fund and if you decide to invest, you’re investing in that fund.
Real Estate Syndication
A Real Estate Syndication is an investment opportunity typically offered through an LLC or LP, and also invests for the purposes of generating income. However, each investment opportunity is connected to one specific property in one asset class. For example, a particular apartment complex, or a storage unit facility.
With Real Estate Syndications, each investment opportunity is connected to a specific asset that has a physical property and address. As an investor, you are one of the owners, but you’re not responsible to manage or maintain the property for the life of your investment.
Big Difference #1 — TYPE OF ASSETS
- REITs — you’re investing in a fund that includes multiple properties across several markets and asset classes, and the fund manages the portfolio.
- Real Estate Syndication — you’re investing along with other investors (as a group) into specific commercial properties, and the lead partners manage the properties and the investment.
2. REITs are offered easily through major stock exchanges.
How to invest in REITs
When you decide to invest in a REIT, you are investing into an investment fund that is sold to you in shares. This means that you can buy shares just like you would buy shares in another company, like Microsoft or Google. The majority of REITs are offered through major stock exchanges, which means that they are usually easy to find and you can make a small investment pretty easily. If you’d like to invest $500 into an REIT, you could find one by noon today and be invested!
How to Invest in a Real Estate Syndication
Once you’ve decided to invest in a specific Real Estate Syndication opportunity, your funds are combined with other investors in the group, and together you own the designated property for the life of the investment.
SEC regulations typically prohibit Real Estate Syndications to advertise publicly. For this reason, most investment opportunities are found through networking, and getting connected to investors directly. These investments are also typically limited to accredited investors (due on SEC guidelines), which limits who can invest.
Big Difference #2 — ACCESS TO INVESTMENTS
- In REITs, you can invest a small amount of money quickly through a major stock exchange.
- A Real Estate Syndication requires due diligence, access to an investor, and typically requires that you’re an accredited investor.
3. Real Estate Syndications offer substantial tax benefits.
As an investor, one of the biggest goals you might have is how to grow your money, protect your investment, and reduce your taxes at the same time. Real estate investments offer a lot of tax benefits, but each situation runs a little differently.
Major tax benefits with Real Estate Syndication
Most Real Estate Syndication investment opportunities are structured as an LLC (limited liability corporation), or an LP (limited partnership), which means income “passes through” the entity, and avoids the double taxation of a corporation. This entity structure combined with the fact that each investment is a real property, offers every investor massive flexibility and great benefits:
- Claim depreciation (paper losses)
- Depreciation benefits often surpass the positive cash flow
- Loan interest is deductible
- Cash flow distributions are sheltered
- Depreciation (paper losses) can be used to offset regular income
Tax benefits for REITs
When you invest in an REIT, you’re investing in a company (buying share) and not purchasing a specific property. So, you get a few tax benefits, but not as many:
- Depreciation: any loss is factored in before you receive dividends. What this means is that you can’t use the loss to offset your income, or against cash flow from the fund.
- Dividends (income from the investment) are taxed as ordinary income. This means it isn’t sheltered or protected by tax benefits related to real estate or capital gains.
Big Difference #3 — TAX BENEFITS
- Real Estate Syndications offer all the tax benefits of owning real property, with additional benefits through depreciation, offsetting income, and interest deductions.
- REITs offer limited tax benefits, since you’re investing in a managed fund.
4. REITs are considered liquid investments
One question to consider with any investment: how fast can I access my money if I want to cash out or sell my interest?
How to sell shares invested in REITs
REITs offer a lot of flexibility here. Since you’re investing as a shareholder, you can sell or buy your shares through the market exchange, and access your investment anytime. There will be standard hold periods, just like any other investment traded on the stock market.
How to sell your ownership in a Real Estate Syndication
Real Estate Syndications are considered short-term investments (typically 5-7 years), since the investment group is buying an actual property. During the life of the investment, each investor will most likely receive passive income (positive cash flow) on a regular basis, while the property builds equity and improves in value. When the property is ready to be sold, each investor receives their portion of the sale, based on the terms of the investment.
Big Difference #4 — INVESTMENT LIQUIDITY
- REITs offer flexibility and fast access if you decide to sell your shares.
- Real Estate Syndications aren’t considered liquid investments, and must be held until the property is sold.
5. Real Estate Syndications typically offer higher returns.
Every investment carries a certain amount of risk, and real estate investments are no exception. Since the focus here is about the difference between REITs and Real Estate Syndications, let’s talk about a few common scenarios.
First, the returns on both types of investments can vary tremendously. This is where historical market data can be helpful!
Data on REITs
On average, when held for a long period of time REITs have out-performed stocks by 2-3%. If you were to invest $100,000 in an REIT, you might get dividends somewhere around $12,800 (12.8%) per year, on average.
This is good news if you’re looking to expand your portfolio.
Data on Real Estate Syndications
Real Estate Syndication opportunities that we offer our investors typically offer gains of 20% of higher. This is because Real Estate Syndications offer a more complete investment picture, including tax benefits, sheltered distributions, depreciation benefits, and passive income.
In this scenario, if you decided to invest $100,000 in a Real Estate Syndication that had an average annual return of 20% over a five year period, this means the return would be $100,000. That’s the same as doubling your investment (a combination of cash flow and profits from the final sale of the property). Not bad, huh?
This is what got me looking into these investments, too. Once I started learning about the opportunities, how they work, what good deals look like and how to vet them properly, I started building my education and experience and learning from the most successful people in the industry.
Big Difference #5 — INVESTMENT RETURN
- REITs typically outperform the stock market by 2-3%, when held for a long period of time.
- Real Estate Syndications often offer gains of 20% or higher, when combined with tax benefits, deductibles, depreciation and passive income structure.
The Big Takeaway
It’s never too early or too late to build your own financial independence. If you’re ready to diversify your portfolio and start investing in real estate then REITs and Real Estate Syndications are a great next step.
REITs allow you to get into the market with a small investment and you can cash out quickly if you need to.
Real Estate Syndications offer great tax benefits and offer some of the highest returns in the industry.
Deciding which is right for you is really about your big picture goals, and for a lot of investors getting started with both can be a great option!