REITs vs Real Estate Syndications
One frequently asked question is What is a REIT? It is often followed-up by how does a REIT (Real Estate Investment Trust) compare to a Real Estate Syndication? When comparing a REIT vs. Real Estate Syndication, here are some key features to keep in mind.
What Asset Are You Buying
When buying a REIT, you are buying a stock. When investing in a Real Estate Syndication, you are a limited partner in a real estate project. Consider this scenario - you invest $50,000 in a REIT. It's important to understand that in this case, you're buying stock in a company, not directly funding a particular property.
Now, imagine investing the same $50,000 in a Real Estate syndication deal. In this scenario, your capital directly goes into an LLC specifically financing a particular real estate project. This approach provides you with in-depth knowledge about the project, including details about the location, business plan, financials, market conditions, and more.
Expected Annualized Return
Consider the above scenario again - you invest $50k, this time in a Real Estate Syndication deal with a five-year hold period. Based on historic annual average return of ~20%, this investment could potentially yield $10,000 in dividends per year for 5 years, resulting in a total profit of $50,000 (accounting for both cash flow and sale profits). Essentially, your investment could potentially double over that 5-year period.
The same $50k invested in a REIT, you would potentially yield $6500 in annual dividends (based on historical annual average return of ~13% for REITs). Investing the same amount in a syndication has the potential of netting you ~50% higher dividends vs investing the same amount in a REIT. And this does not take into consideration the tax benefits of a syndication.
Access to Capital
Similar to purchasing stocks, when you invest in a REIT, you have the flexibility to sell your shares whenever you choose. This means you have easy access to your invested capital, allowing you to liquidate your investment if needed.
On the other hand, Real Estate syndications often have a predetermined "hold period" specified in their business plan. During this period, your invested capital is committed to the project and not readily accessible. This means you don't have the same level of flexibility to withdraw your funds until the hold period expires according to the syndication's terms.
Flexibility & Qualifications
REITs offer various investment options as they are commonly listed on major stock exchanges. Meaning, you can directly invest in them, choose mutual funds that include REITs, or opt for exchange-traded funds (ETFs) that focus on REITs. Investing in REITs is easily accessible through user-friendly online platforms, and in some cases, you can start with relatively small amounts of capital.
On the other hand, Real Estate syndications are not as simple. They operate under SEC regulations which impose minimum requirements for investors. For one, you must qualify as an accredited investor to play in real estate syndication. This means you must have one of the following: a net worth of over $1 million, excluding primary residence (individually or with spouse or partner), income over $200,000 (individually), or $300,000 (with spouse or partner) in each of the prior two years. Also, it is more challenging to come across Real Estate syndications unless you have prior knowledge of a sponsor, like Turbine Capital, or connect with other passive investors.
Tax Benefits
Good news here is investing in a REIT comes with depreciation benefits. The bad news - these benefits are factored in before dividend payouts. Furthermore, there are no additional tax breaks and the depreciation cannot be used to offset other income. It is also worth mentioning that dividends from REITs are typically taxed as ordinary income, which has the potential to increase your overall tax burden.
On the other hand, when you invest in a real estate syndication deal, you gain access to a broader range of tax savings. As a limited partner investing directly in a property, you become eligible for various tax deductions unavailable in REITs, with depreciation being a significant advantage. In certain cases, the depreciation benefits can even surpass the cash flow generated, resulting in a loss-on-paper but a positive cash flow situation.
The decision between REITs and Real Estate syndications hinges on your specific investment goals. If easy access to your capital is a priority, REITs may be a suitable choice for you. On the other hand, if you qualify as an accredited investor and are looking to expedite your wealth growth, Real Estate syndications provide a promising pathway. Ultimately, real estate syndications open dynamic benefits not available with REITs for the growth minded accredited investor.
Turbine Capital specializes in commercial real estate syndication deals for pilots and other high-income w2 professionals. If you’d like to learn more about commercial real estate investing, please join our investor club.
