One of the most highly recommended options for passive real estate investing is a real estate investment trust (REIT). However, just because it’s a really common option doesn’t mean it’s the best choice for you. When you compare REITs to real estate syndications, you might find that there are better returns available elsewhere.
REITs are simple and convenient, but they may not be your best choice in the long-term. Passive investors should highly consider Real Estate Syndications as a viable alternative.
DIFFERENCES BETWEEN REITS & REAL ESTATE SYNDICATIONS
When you buy into a REIT, you’re buying stock in a fund that owns a real estate asset. REITs own many different properties within a particular asset class. Meaning, if you buy into a retail REIT, the fund will own real estate in the retail sector. When you buy into the fund, you don’t get any say in what the fund invests in.
Syndications are a form of combined investment in which investors join together to purchase a specific property. Usually, a business plan is laid out ahead of purchase and the asset is purchased through an LLC.
Learn more about syndications here: What Is a Real Estate Syndication?
There are distinct differences in ownership, risks, capital requirements, and benefits.
YOUR ROLE IN THE INVESTMENT
Ownership is one of the biggest differences between REITs and syndications. Buying into a REIT gives you ownership into the investing entity while syndication gives you ownership into the asset itself. REITs are more closely related to stocks and bonds rather than true real estate investment.
With a syndication, you are directly involved in the purchase and management of the real estate asset. Before you buy in, you’re given information about the investment property so you can perform your due diligence on the opportunity and potential returns.
RISKS
The market affects REITs more directly than multifamily syndications. Unlike syndications, when the market value of your REIT holdings goes down, you do not have any equity to fall back on. Real estate syndications give you direct equity in a physical asset, allowing some cushion against total loss of value.
With syndications, you’re able to fully evaluate the investment property before you buy-in. You can perform a risk assessment to know what you’re getting into.
MAXIMIZING YOUR PASSIVE INVESTMENT
REITs tend to outperform the stock and bond markets, but there are definite disadvantages. REITs distribute income in the form of dividends, which are not tax-deductible. They also distribute from net income rather than earnings, resulting in a lower payout. Additionally, REITs often have fees that are not fully transparent.
Syndications distribute income before depreciation, allowing you to significantly reduce your tax burden through claiming asset depreciation.
CAPITAL REQUIREMENTS
Anyone, even those with limited capital, can buy into publicly-traded REITs. On the other hand, syndications are more exclusive. Only recently have syndications been allowed to advertise publicly, and even then, they are generally limited to accredited investors and a certain number of sophisticated investors. There are often specific investment minimums with syndications that don’t exist with most REITs.
FINAL THOUGHTS
REITs and syndication both have their place in a well-balanced real estate portfolio. While REITs are better for truly passive income, they don’t provide the same level of returns or control that some investors are looking for. Passive investing in Syndications provides a more reliable stream of income with the added benefits that come from actual property ownership.