One of the most common questions I get asked is, “What’s the different between a REIT and real estate syndication?”Both allow you to invest passively in real estate, but there are key differences between the two.
First off…what is a REIT?
REITs (real estate investment trust) are companies that own, operate, or finance commercial real estate.REITs tend to specialize in specific property types like office buildings, multifamily apartments, or retail shopping centers.Most REITs are traded on major stock exchanges.Like a stock, you can buy shares in that company.
So you would assume that if you invest in a REIT that invests in apartments, then you’ll directly be investing in apartments.Nope, not really.
Below are the main differences between REITs and real estate syndications:
#1 – Number of Properties
REITs: With a REIT, you’re investing in a company that holds a portfolio of properties across different markets.For instance, when you invest in an apartment REIT, you are investing into all the apartments across their portfolio.A REIT investment portfolio could contain hundreds or even thousands of different properties.This provides you with a highly diversified portfolio, but you have no say in which properties the REIT buys or sells, or which cities or submarkets they choose to invest in.
Syndications: With most real estate syndications, you are investing in a single property in a single market.You have more control over the property selection process.You are provided with specific information about the property, and you know exactly where your money is going.
The sponsor’s track record, the business plan, financials and market fundamentals are all laid out for your consideration. Thus, you can perform your own due diligence to ensure you’re comfortable with every aspect of the investment.
#2 – Ownership
REITs: When you invest in REITs, you own shares in a company that owns the real estate.It’s just like buying shares in Apple or Tesla.You actually don’t own the underlying real estate.
Syndications: When you invest in a syndication, you have direct ownership of the property.You’re investing directly in a specific property, so that together with the general partners and other limited partners, you own the property.
#3- Access
REITs: The majority of REITs are publicly listed on major stock exchanges, so they are easy to find and to invest in.You can invest in a REIT with a few clicks and in just a few minutes.
Syndications: Real estate syndications are more difficult to find, and the process to invest involves more time and effort compared to a REIT.Some real estate syndications are under SEC regulations that doesn’t allow public advertising.As such, you would need to be connected with someone who’s got a deal.Furthermore, many real estate syndications are only accessible to accredited investors who meet certain income and/or net worth requirements, which can add an additional hurdle to investing.
#4 – Investment Minimums
REITs: Just like a stock, when you invest in a REIT, you are purchasing shares in a company. So you can invest in a REIT with a very small amount of money.The amount of capital that it takes is at least one share (this could be $100 or less).
Syndications: On the other hand, syndications have higher minimum investments. Theminimum investment varies with each deal, but the typical minimum is $50,000 (some can be as high as $100,000 or more).
#5 – Liquidity
REITs: You can buy or sell your shares in a REIT at any time, and your money is not locked in for a specific amount of time.You can get in and out whenever you like, making a REIT a liquid investment.
Syndications:When you invest in a syndication, you’re a direct owner of the real estate.Just like you can’t buy and sell your personal home with a click of a button, you can’t do that for syndications either. Your investment dollars are held for a certain amount of time according to the business plan.During this time, your money is illiquid.
#6 – Tax Benefits
REITs: When you invest in a REIT, you’re investing in the company and not directly in the real estate, so the tax benefits are a bit less exciting.Like stocks, the only way to receive a tax advantage is if you lose money and deduct that loss on your taxes.All dividends and payouts are considered ordinary income, which adds to your tax burden.
Syndications: Syndications win when it comes to tax advantages.First, you can deduct for depreciation of the asset, which can result in a substantial reduction in tax liability.Syndications often use cost segregation and bonus depreciation, which means there can be as much as a 50 to 70% depreciation paper loss in the first year. It’s common for investors to avoid paying taxes on the first five to seven years of distributions because their dividends are offset by depreciation.
Furthermore, with certain syndications that have a value-add strategy, the sponsor will typically refinance the property once improvements are complete and the property’s value is higher.In this case, you may be able to get most of your initial investment back with a refinance, which is considered a non-taxable event, so you can reinvest that money pre-tax into another deal and compound your returns.
Conclusion
As you can see, REITs and syndications both have their place.Now that you know some of the key differences between a REIT and real estate syndication, you can weigh the pros and cons of each and decide if one, either or neither is right for you.Whether you choose a REIT or syndication, investing in real estate is still considered one of the best ways to build wealth.
