REITs and Real Estate Syndications – Both Have Their Pros and Cons. Which is Right For You?
Investing in real estate is considered by many to be a low-risk path to wealth and a great way to secure retirement income. Real estate syndications and REITs, Real Estate Investment Trusts, are both good ways for groups of investors to pool their resources to invest in properties. Both options work well, depending on your personal goals and preferences.
Multiple Assets Versus a Single Asset
REITs: Real Estate Investment Trusts generally invest in a portfolio of properties. REITs may concentrate on an asset type, such as multifamily, shopping malls, office buildings, or commercial properties, or they may spread around the love by investing in several types of real assets. Your investment in the REIT comes via the purchase of shares of the company, much like buying stocks. The REIT’s team handles management of the properties without your involvement or knowledge of the specifics of each property.
Syndication: Investors pool their capital together with other investors to purchase a single property in a single market. You will know the specifics of the property, the business plan, and the objectives of the investment. Investors typically receive monthly updates on the specific details of the project plan and have the ability to ask questions of the sponsorship team managing the asset.
Ownership Structure
REITs: You do not invest directly in ownership of the property, instead purchasing shares of ownership like buying stocks. REIT’s are taxes like stocks and carry no real advantages to other investments.
Syndications: You and the other investors will own an entity (often an LLC) that purchases and holds direct ownership of a single property. With the other investors, you hold direct ownership. This creates major tax advantages including accelerated depreciation and 1031 exchange opportunities.
Liquidity
REITs: Shares of ownership are purchased on major exchanges, are easily bought and sold, and can be purchased directly or as mutual funds.
Syndications: Syndications are typically less liquid. Most sponsors will make a best effort to find a buyer for your shares, but that isn’t guaranteed. Most investment timeframes on syndications are 3-5 years.
Barrier to Entry
REITs: Buying shares on an exchange means that the investment to get into a REIT can be quite small, just a few hundred dollars.
Syndications: There are higher minimum investment amounts for real estate syndications, often $75,000 to $100,000.
Tax Benefits
REITs: With REIT investments being ownership shares in a company, benefits for taxes are factored into the company’s operations before the dispersal of dividends. The investor’s dividends are then taxed as ordinary income.
Syndications: As the individual investor’s ownership is actual shared ownership of the property, all the tax benefits of real estate ownership pass through. Between normal expense deductions and depreciation, tax benefits can be extensive. The 1st year depreciation on syndications may often be as much as $.50 to $.60 for every dollar invested. This depreciation can be used to offset other passively earned income.