The tax advantages of multifamily investing, including K-1 losses, are what make this kind of real estate investment so attractive.
REITs vs Real Estate Syndication, What Gives?
Confused as to how REITs vs Real Estate Syndication compare? Let’s clear it up. First off, most financial gurus tell their clients (and anyone who will listen) they need to put their money into real estate if they want to build a passive income. This is an easy enough concept to understand, but a bit more complicated concept to execute. Especially if you’re an average investor.
You find yourself here: you’ve worked hard to build enough residual income to comfortably consider investing, but are now unsure of the actual mechanics involved in real estate investment. Most likely you know you don't want to deal with the headaches of being a landlord, but the idea of stepping into the world of REITs (Real Estate Investment Trusts) and real estate syndication make your head spin.
Take a minute to breath.
It doesn't have to be as complicated as it sounds. Both REITs and real estate syndication are viable options for investors who have the funds to invest and are interested in a large return on investment.
Quick Comparison - REITs vs Real Estate Syndication
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Your mission, if you choose to accept it, is to read through a checklist of pros and cons for REITs vs real estate syndication. I’m sure that when we’re through, one investment is going to fit your needs more so than the other.
As you continue to read, silently tally up whether the description of the REIT or the real estate syndication fits your needs better in each category. Once you finish, re-read the subheads and see which real estate investment opportunity you leaned towards the most.
Whichever direction you’re leaning more in will tell you your answer. Still unsure? Introduce yourself to a passive investor that can dig deeper into both options with you (or mention your questions in comments and I will get back to you).
The Basics of Real Estate Investments
You essentially have three options when it comes to investing in real estate. Buying and renting property, which most people don't want to mess with, and investing in real syndication or a REIT.
Real Estate Syndication- A real estate syndication is an investment made by a group of people directly into real assets. When you choose to invest in syndication, you partner with a group of people and other investors. You all know what building, apartments, or office space that you own a physical share in.
REIT (real estate investment trust)- On the other hand, when you invest in a REIT you are investing with a company that buys income-producing commercial real estate and raises its value. You are simply investing in the company, so to speak, so you will never physically own the property nor will you know where your money goes. You will only see the return. It's very similar to buying shares on the stock market, in this scenario you are simply buying shares of a real estate investment trust.
How Liquid Can You Be?
One of the major factors that will influence whether a REIT or syndication is even an option, is the overall liquidity of your investment. Since a REIT is similar to a stock, it is flexible and you can withdraw your investment without too much hassle if you need to access the funds.
However, real estate syndication generally locks you into the investment property over the life of the business plan. Sometimes there are ways to withdraw your capital, but they may come with penalties.
The Bottom Line: If you can comfortably live without your investment funds both a REIT and syndication could be an option. If you suspect you will need to access your investment, then a REIT is the only reasonable choice.
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Public Vs Private Access
Most REITs are listed on major stock exchanges. Thus, you don't need a lot of savvy or networked connections to find a REIT you can invest in. Many people prefer to invest directly into REITs, but you can invest via exchange-traded funds or mutual funds. You could actually invest in the next ten minutes if you have the funds ready.
But stay with me, we’re almost finished here.
Real estate syndications are a bit more tricky. Real estate syndications adhere to a specific SEC regulation that does not allow the Sponsors to publicly advertise the syndication to nonaccredited investors. Thus, you need to have a connection before you can invest in a syndication. The process of investing in a syndication is a bit more complicated, and will take a few weeks to complete since you will need to sign legal documents in person. If you’re not an accredited investor, you must be a sophisticated investor.
The Bottom Line: If you want to invest right away and do not know anyone already involved in a syndication, the REIT may be more accessible for you. However, a financial professional may be able to assist you with finding a formidable syndication if you match the financial profile.
Minimum Investment Amounts
Since you are essentially buying shares in a company investment group when you invest in a REIT, you can usually purchase as little or as many shares as you like. This means $100 could be enough to get started depending on which REIT you have your eyes on.
Syndications are private but direct investments that carry higher minimum investment rates. No one wants to own 1.4% of a building, and no group of investors want to partner with the small guy. Usually you need to invest at least $50,000, but there is no golden number. It varies by each syndication and can start at $10,000 or be as high as $200,000.
The Bottom Line: Real estate syndications require more capital than REITs.
Return on Investment Rates
Of course, anyone thinking about making an investment wants to know what the ROI is. This is where real estate syndication gets a turn to shine. If you are looking for financial freedom during your retirement years, a real estate syndication may help you get there.
The average real estate syndication is able to offer a return on investment rate of at least 20 percent annually. This is after cash flow and profits from the asset sale are worked out. That means if you invested $100,000 in one year you can earn an additional $20,000 by the close of the first year. In five years you would actually double your investment.
On the other hand, since REITs rely more on the exchange, the returns are a bit more modest although they are certainly still worth noting. Returns for a REIT can vary based on timing, people, and assets, but historically most REITs averaged a 12.87 percent return on investment. This is still higher than the return on stocks which average 11.64 percent.
What does this mean for you? Taking that $100,000 figure from earlier, if you invested in a REIT you would earn about $12,870 in dividends annually.
The Bottom Line: Real estate syndications on average offer almost double the annual rate of investment when compared to REITs. Investors should remember though that both REITs and real estate syndication returns vary based on a variety of factors (both predictable and unpredictable).
And the Clear Winner Is…
I hope this article made it clear that there is no hard and fast winner between REITs and real estate syndications. It all depends on your financial health, liquidity, investing philosophy and overall goals. If you have any questions or comments on the advantages and disadvantages of either approach, please share them in the comments.
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Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
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