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Investing in real estate is a great way to build your wealth and your portfolio, but taking on a landlord role isn’t for everyone. If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Most people don’t welcome the unexpected issues and expenses that come along with active real estate investments.
Many investors considering real estate as an investment vehicle take their first step by investing in a real estate trust, or a REIT, which are easily accessible, similar to stocks.
When you choose to invest in a REIT, you’re buying stock in a company that invests in commercial real estate. Most people assume that if you’re investing in an apartment REIT, you must be investing directly in an apartment building.
That’s actually not the case at all.
In this article, I’m taking a deep dive into the differences between a REIT and a real estate syndication.
When you invest in a REIT, you’re putting your capital into a company that holds a portfolio of properties across multiple markets in a particular asset class. For example, individual REITs are available for apartment complexes, shopping malls, office buildings, elderly care, etc.
This creates an amazing opportunity for diversification for investors.
On the other hand, with real estate syndications, you’re investing in a single property in a single market. So you know the asset’s exact location, the number of units, the financial details specific to that property, and the business plan for your real estate investment.
As an investor in a REIT, you invest by purchasing shares in the company that owns the real estate properties.
Investing in a real estate syndication means you and your fellow investors contribute directly to purchasing a specific property through the entity that holds the asset. For these investment deals, the entity is typically an LLC or LP.
You can find most REITs listed on major stock exchanges. When you find a REIT that interests you, you can invest in it directly through mutual funds or exchange-traded funds. The process of investing in a REIT is quick and easily completed online.
However, real estate syndications are often under an SEC regulation that disallows public advertising. As a result, real estate syndication deals can be quite difficult to find without knowing the sponsor or other passive investors. Another hurdle for would-be investors is that many syndications are only open to accredited investors.
Once you have a solid connection, become an accredited investor, and find a deal, you should still allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds.
The monetary barrier for entry into a REIT is quite low. Given that you’re purchasing shares on the public exchange, you can start investing in a REIT for as little as a few dollars.
Real estate syndications have higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.
When investing in a REIT, your money is liquid. At any time, you can choose to buy or sell your investment.
Real estate syndications, however, are accompanied by a business plan. This plan typically outlines holding the property for a certain amount of time, often five years or more. Your money is locked in and unavailable to you during the holding period.
One of the most significant benefits of investing in real estate syndications over REITs is the taxes. When you invest directly in a property, whether a home or a real estate syndication, you receive several standard tax deductions.
The main tax benefit in a real estate syndication is depreciation. To put it simply, when investing in a syndication deal, you’re able to write off the asset’s value over time.
As a passive investor in a real estate syndication, it’s not uncommon for the depreciation benefits to surpass the cash flow. So even though you may show a loss on paper, you can still have positive cash flow. Those paper losses can offset your other income, like that from a W-2 employer.
On the other hand, when you invest in a REIT, you’re investing in the company and not directly in the real estate property itself. As a REIT investor, you do get depreciation benefits, but those are factored in before dividend payouts. There are no other tax breaks on top of that, and you, unfortunately, can’t use that depreciation to offset any of your other income.
Another negative in terms of taxes for a REIT investment is that dividends are taxed as ordinary income, which unfortunately contributes to a larger tax bill rather than a smaller one.
As you probably know, returns for real estate investments can vary wildly. For example, according to historical data compiled over the last forty years, exchange-traded U.S. equity REITs have an average of 12.87 percent per year in total returns. In comparison, stocks averaged 11.64 percent per year over that same period.
On average, this means if you invested $100,000 in a REIT, you could expect to earn around $12,870 per year in dividends, which is decent ROI.
That being said, when cash flow and the profits from the sale of the asset are figured in, real estate syndications can offer around 20 percent average annual returns.
For 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 five years, or $100,000, taking into account both cash flow and profits from the sale, which means your money doubles over those five years. Real estate syndications offer phenomenal ROI.
Now that you better understand the difference between a REIT and a real estate syndication, you’re likely wondering which one you should invest in.
As you know, there’s no one best investment for everyone.
If you have limited capital to invest and want to access that money freely, you may consider investing in REITs. On the other hand, if you have more money available to invest and want direct ownership, want to talk to the sponsors directly, and want more tax benefits, a real estate syndication may be the best fit for you.
It’s essential to keep in mind that it doesn’t have to be one or the other. Many new investors start with REITs and later migrate toward real estate syndications. Regardless of how you choose to start, investing in real estate is the first step in building your wealth and portfolio.
Investing in real estate is a great way to build your wealth and your portfolio, but taking on a landlord role isn’t for everyone. If real estate investing seems interesting to you, but you’d rather avoid becoming a landlord, you’re not alone. Most people don’t welcome the unexpected issues and expenses that come along with active real estate investments.
Many investors considering real estate as an investment vehicle take their first step by investing in a real estate trust, or a REIT, which are easily accessible, similar to stocks.
When you choose to invest in a REIT, you’re buying stock in a company that invests in commercial real estate. Most people assume that if you’re investing in an apartment REIT, you must be investing directly in an apartment building.
That’s actually not the case at all.
In this article, I’m taking a deep dive into the differences between a REIT and a real estate syndication.
When you invest in a REIT, you’re putting your capital into a company that holds a portfolio of properties across multiple markets in a particular asset class. For example, individual REITs are available for apartment complexes, shopping malls, office buildings, elderly care, etc.
This creates an amazing opportunity for diversification for investors.
On the other hand, with real estate syndications, you’re investing in a single property in a single market. So you know the asset’s exact location, the number of units, the financial details specific to that property, and the business plan for your real estate investment.
As an investor in a REIT, you invest by purchasing shares in the company that owns the real estate properties.
Investing in a real estate syndication means you and your fellow investors contribute directly to purchasing a specific property through the entity that holds the asset. For these investment deals, the entity is typically an LLC or LP.
You can find most REITs listed on major stock exchanges. When you find a REIT that interests you, you can invest in it directly through mutual funds or exchange-traded funds. The process of investing in a REIT is quick and easily completed online.
However, real estate syndications are often under an SEC regulation that disallows public advertising. As a result, real estate syndication deals can be quite difficult to find without knowing the sponsor or other passive investors. Another hurdle for would-be investors is that many syndications are only open to accredited investors.
Once you have a solid connection, become an accredited investor, and find a deal, you should still allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds.
The monetary barrier for entry into a REIT is quite low. Given that you’re purchasing shares on the public exchange, you can start investing in a REIT for as little as a few dollars.
Real estate syndications have higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.
When investing in a REIT, your money is liquid. At any time, you can choose to buy or sell your investment.
Real estate syndications, however, are accompanied by a business plan. This plan typically outlines holding the property for a certain amount of time, often five years or more. Your money is locked in and unavailable to you during the holding period.
One of the most significant benefits of investing in real estate syndications over REITs is the taxes. When you invest directly in a property, whether a home or a real estate syndication, you receive several standard tax deductions.
The main tax benefit in a real estate syndication is depreciation. To put it simply, when investing in a syndication deal, you’re able to write off the asset’s value over time.
As a passive investor in a real estate syndication, it’s not uncommon for the depreciation benefits to surpass the cash flow. So even though you may show a loss on paper, you can still have positive cash flow. Those paper losses can offset your other income, like that from a W-2 employer.
On the other hand, when you invest in a REIT, you’re investing in the company and not directly in the real estate property itself. As a REIT investor, you do get depreciation benefits, but those are factored in before dividend payouts. There are no other tax breaks on top of that, and you, unfortunately, can’t use that depreciation to offset any of your other income.
Another negative in terms of taxes for a REIT investment is that dividends are taxed as ordinary income, which unfortunately contributes to a larger tax bill rather than a smaller one.
As you probably know, returns for real estate investments can vary wildly. For example, according to historical data compiled over the last forty years, exchange-traded U.S. equity REITs have an average of 12.87 percent per year in total returns. In comparison, stocks averaged 11.64 percent per year over that same period.
On average, this means if you invested $100,000 in a REIT, you could expect to earn around $12,870 per year in dividends, which is decent ROI.
That being said, when cash flow and the profits from the sale of the asset are figured in, real estate syndications can offer around 20 percent average annual returns.
For 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 five years, or $100,000, taking into account both cash flow and profits from the sale, which means your money doubles over those five years. Real estate syndications offer phenomenal ROI.
Now that you better understand the difference between a REIT and a real estate syndication, you’re likely wondering which one you should invest in.
As you know, there’s no one best investment for everyone.
If you have limited capital to invest and want to access that money freely, you may consider investing in REITs. On the other hand, if you have more money available to invest and want direct ownership, want to talk to the sponsors directly, and want more tax benefits, a real estate syndication may be the best fit for you.
It’s essential to keep in mind that it doesn’t have to be one or the other. Many new investors start with REITs and later migrate toward real estate syndications. Regardless of how you choose to start, investing in real estate is the first step in building your wealth and portfolio.
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No Offer of Securities—Disclosure of Interests. Under no circumstances should any material at this site be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the Confidential Private Offering Memorandum relating to the particular investment. Access to information about the investments are limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments.
The information on the get-FREED website and through the FREED brand, marketing and communications is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Information this website may not constitute the most up-to-date legal or other information. No reader of this website should act or refrain from acting on the basis of information on this website without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained or mentioned within the website do not create a relationship between the reader and getFREED.
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