If real estate investing has piqued your interest, but you’d rather avoid becoming a landlord, you’re not alone. Fixing toilet emergencies at 3 AM isn’t appealing to most people, myself included.
The next logical step that many investors take is investing in a real estate investment trust (REIT). REITs are easy to access (often through a company’s 401k) and can trade just like stocks.
When investing in a REIT, you’re buying stock in a company that invests in commercial real estate. So, most people naturally figure, if you invest in an apartment REIT, it’s the same as investing directly in an apartment building.
That couldn’t be further from the truth.
Let’s explore the 7 biggest differences between REITs and real estate syndications:
When you invest in a REIT, you purchase shares in the company that owns the real estate assets. It’s not uncommon for the market capitalization of the REIT to exceed the value of the underlying assets.This means that the value of your ownership stake can be overvalued.
When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset.
One of the biggest benefits of investing in real estate syndications versus REITs is tax savings. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).
Oftentimes, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer.
When you invest in a REIT, because you’re investing in the company and not directly in the real estate, you do get depreciation benefits, but those are factored in prior to dividend payouts. There are no tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.
Unfortunately, dividends from REITs are taxed as ordinary income, which can contribute to a larger, rather than smaller, tax bill.
A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls, office buildings, elderly care, etc.
On the flip side, with real estate syndications, you are a co-owner a property or multiple properties in the case of a fund, in either a single market or a small handful of different markets. The difference here is that even though you are investing in fewer assets at a given time, you are able to evaluate that market and the asset details with much more scrutiny than the properties found within REITs. You know the exact location, the number of units, the financials specific to that property, the business plan for your investment and have direct access to the sponsorship team.
Most REITs are listed on major stock exchanges, and you may invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily online.
Real estate syndications, on the other hand, have traditionally only been offered behind closed doors to people and families with the “right” connections.. At Blue Elm Investments, we’re here to change that and help more people find these opportunities and leverage their wealth-building power.
Syndications are regulated under the SEC. Some of these regulations disallow public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. Luckily, these opportunities are coming more into the public sphere, allowing both accredited and non-accredited investors options to participate. Again, we’re working hard to do that.
When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few bucks. Thus, the monetary barrier to entry is low.
Alternatively, syndications have higher minimum investments, often $25,000 – $50,000 or more. Because of this higher entry point, real estate syndication investments require significantly higher capital than REITs.
For a publicly traded REIT, you can buy or sell shares of your REIT at any time. However, for non-publicly traded REITs, which are some of the most lucrative, capital is less liquid. These often have minimum investment periods of 7 years or more. However, REIT management may even limit the withdrawal of capital beyond that. Certain events or market conditions may cause a REIT to block withdrawals, or essentially render your liquid capital illiquid at the drop of a hat. One such time was during the interest rate increases in early 2023 when so many investors went to cash out of their shares at the same time. REITs such as Blackstone, Starwood Capital Group, and KKR.
However, it is essential to understand the fees associated with REITs, as there may be some associated with withdrawing your funds early.
Real estate syndications are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 5 years), during which time your money is locked in, or illiquid.
While returns for any real estate investment can vary, the historical data over the last forty years reflects an average of 12.87 percent per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64 percent per year over that same period.
This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is a great ROI. Over a 5 year hold period, your total returns would amount to about $64,000.
Between the cash flow and the profits from the sale of the asset, real estate syndications can offer around 15-20 percent average annual returns.
As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may make $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over the course of those five years. This is the same as seeing a 2x equity multiple in a potential real estate syndication.
The difference in returns between the REIT and the real estate syndication in this example is $36,000, or $7,200 per year (with a syndication investment coming out ahead). Over 20-years of investing, that amount compounds significantly.
The differences between real estate syndication investments and REITs may help you decide which one is right for you. Ultimately, it comes down to your investing goals and how you want or need your capital to grow.
All in all, there’s no one best investment for everyone (but you knew that, right?).
If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have a bit more available and want direct ownership, want to be able to talk to the sponsors directly, and want more tax benefits, a real estate syndication may be a better fit.
And remember, it doesn’t have to be one or the other. I personally have small investments in a few REITS where I’m looking to invest in different asset classes than my syndications
You might begin with REITs and then migrate toward real estate syndications later. Or you might dabble in both to diversify. Either way, investing in real estate, whether directly or indirectly, is forward progress.
Here at Blue Elm Investments, we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits.
If you’re accredited and looking to deploy capital, we invite you to sign up for our Investor Club to get access to our current or upcoming opportunities.