Investing in real estate is a great way to build wealth, create passive income and diversify your portfolio.
Over the last several years we have been exposed to the “fix and flip” made popular by television shows. But there are other options to choose from if you are interested in real estate investing.
Two of the lesser-known options are the REIT (Real Estate Investment Trust) and syndication. They are similar in that they allow you to invest in bigger and more diverse projects, but they are very different in concept and how they are structured. So how do they measure up?
Let’s compare
First, a REIT is a company that owns and operates real estate. The company pools individual investor capital to purchase and operate a group of properties like apartment buildings, hotels, warehouses and even cell towers.
When you invest in a REIT, you are buying stock in that company and it generates a steady income flow to its investors.
Investing in a REIT is a more liquid way to own real estate since it can be easily traded or sold in the stock market. On the other hand, you aren’t involved in the choice of properties purchased and held. Further, while it is a more liquid form of real estate investment, you see little in the way of capital appreciation.
On the other hand, if you invest in a syndication, you are directly investing in the real property and not a company.
You are not buying into the company, but rather you and other investors become partners to combine capital and resources to purchase and manage your own property.
Depending on the structure, the syndication is usually limited to investing in one particular property and not a group of properties. Each investor on the General Partner team will contribute knowledge, skills and/or capital to purchase, renovate and lease a particular property with a return expected both during the hold period as well as a return on investment when sold.
So, which is better, a REIT or a syndication?
Well, the answer isn’t that straight forward…………….It depends on what you are expecting.
Some of the questions you should be asking yourself are:
Are you looking for a safe and less risky investment or are you looking for a higher reward/return on investment? Do you want to be more involved in the decision-making process of which real estate is bought, sold and held? How much are you wanting or willing to invest?
If you have little to invest and looking for a very diversified portfolio you would most likely want to stick with the REIT. There is less risk, less involvement, less investment needed and is more liquid if you decided you needed to sell. However, there is often less return. A REIT is a very macro approach to real estate investing since the holdings are usually spread across the country with multiple properties in the trust.
Conversely a syndication, while perhaps considered less liquid and MAYBE riskier, can offer higher returns, allow for more involvement in decision making and has tax advantages not found with a REIT.
As a matter of fact, the tax conversation by itself could be the deciding factor when comparing the two. In short, if you invest in a REIT, you are purchasing stock. So, from a tax perspective your dividends would be considered ordinary income and taxed as such. This could increase your tax liability.
Yet, with a syndication, you get the advantage of actually owning the real estate and not a stock. Meaning, you get the benefit of depreciation. The paper loss against actual cash flow helps protect you from additional tax liability.
Now, what about returns? On average, over the last 40 years the stock market shows an annual return of about 9%. REIT’s have fared slightly better just under 13%.
However, syndications often have loftier goals that are divided between the annual income from leasing and then the profit from the eventual sale. The return is tied to how the syndication is structured, your initial investment, the hold period, etc.
But suffice it to say, even if you don’t see an average annual return comparative to a REIT, you will have the added benefit of profiting from the sale after the hold period. Many syndications may average upwards of 25-50% return after the holding period.
Of course, investing in anything has risk and real estate isn’t any different. Real estate is local, and values can go up and down just like any other investment. However, a syndication is a great way to invest in real estate you may not be able to invest in otherwise. You get the benefit of knowing the local economy around the investment as well as getting both cash flow AND capital appreciation… and don’t forget the tax benefits.
This is really why we’re really bullish on investing in real estate, more specifically, syndicating a real estate deal.
Our ebook was written with real estate investors in mind. Download your copy and learn more about power of real estate for creating wealth.
If you’re looking to learn more about multifamily syndication or want to have access to our future deals schedule with us.
Sam Khairi
Afto Capital
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