Real estate is an attractive investment for many investors. There are many ways to place your capital in real estate, and benefit from the many advantages the asset class has to offer. REITs, and apartment syndications, are two common ways investors grow their wealth utilizing commercial real estate assets. But there are differences between these two investment vehicles. And that’s what we’re diving into below.
Defining a REIT
According to REIT.com, a REIT, which stands for a Real Estate Investment Trust, is an organization that owns or funds cash-flowing real estate properties across a variety of asset classes. These companies are required to meet certain criteria to qualify, and they are typically offered on major stock exchanges.
Similar to the way mutual funds offer investors with investment opportunities, REITs own, operate, and/or finance real estate assets. About 145 million Americans are in households invested in REITs. Americans invest in REITS through “401(k), IRAs, pension plans, and other investment funds,” as explained by REIT.com.
In the U.S., REITs collectively own over $3,5 trillion in assets. This equates to over 500,000 properties. These properties include a wide range of real estate, from apartment buildings, office spaces, hotels, retail, and medical offices.
What is an Apartment Syndication?
An apartment syndication involves multiple real estate investors pooling their money together with other investors in order to buy a large apartment complex.
There are two types of investors in an apartment syndication. The active investor is part of the team that oversees the property, manages the business plan, and ensures it is a success. These investors are involved in either the day-to-day management of the property, or they oversee a third party property management company.
Passive investors, on the other hand, simply invest their money in the deal. They have a hands-off role in the deal, and don’t have control. Passive investors benefit from the cash flow, tax benefits, and profits of the deal without the hassle of managing the property.
Similarities Between a REIT and an Apartment Syndication
Reliability- REITs and Apartment syndications offer many of the benefits that come with investing in real estate. Real estate has historically proven to be recession resilient, and demand for rental properties only continues to grow. Apartment syndications and REITs have also historically outperformed the stock market. The benefits of lower volatility and higher returns than stocks are reaped by shareholders in an REIT and investors in an apartment syndication.
Long Term Investments: Both apartment syndications and REITs are considered long term investments. These investments should be considered as being five years or longer.
Despite a few similarities, REITs and Apartment Syndications are very different from each other.
Differences Between a REIT and an Apartment Syndication
When it comes to an apartment syndication, you have access to an actual person you can reach out to if you have any questions or concerns. This person is also an investor in the property like you. This relationship can expand your network, and help you address any questions you may have about the property.
REITs are different, and can present challenges you wouldn’t experience with an apartment syndication. Since REITs are publicly traded companies, their sole focus is to elevate the value of their stock, not improving and operating real estate assets. Just like a stock investment, communication is likely not their priority.
Number of Properties
When you invest in a REIT, you are typically investing in multiple different properties in different markets. Each REIT has a focus. Some may specialize in apartment complexes, while others focus on self storage, and others focus on retail centers. If you invest in a REIT that specializes in apartment complexes, you’re probably investing in a portfolio of apartments spread across various markets. As an investor in a REIT, you don’t have any control over where the REIT invests your money, or which properties. Because REITs own various different types of properties, investors are able to diversify and spread their risk among multiple different property types by investing in one REIT.
With apartment syndications, you are investing in one apartment complex in a particular market. The benefits of this are that you’ll know exactly where the property is, what the business plan is, and you’ll be able to review the specific financials of that property. You’ll be able to analyze the market it’s located in, and determine the risks associated with that particular property.
Difference in Ownership
REIT investors are shareholders of the company that owns the real estate assets. They do not own the real estate itself. This functions in the same way that owning stock in Tesla or Walmart would.
In an apartment syndication, the passive investors are part owners of the actual apartment complex. They are investing directly into that particular apartment property. Passive investors, along with the active investors, are part owners of the company, and therefore have ownership of the property itself.
There are benefits to having direct ownership of the property, which we will discuss later on in this article.
Access to Opportunities
REITs are listed on most global exchanges, similar to most public stocks. You can invest directly into a REIT, or you can use your 401(k), mutual fund, or other investment funds. It’s easy to access REITs and invest in them because they are publicly traded.
Apartment syndications are private placements, which makes them more difficult to access. The process of investing in a syndication can also take more time. There are many syndications that aren’t allowed to publicly advertise their offerings due to SEC guidelines. This requires that passive investors have a pre-existing relationship with the active investors in order to get access to the apartment syndication. Unlike a REIT, it can take a few weeks to invest in an apartment syndication deal. During this time, passive investors will review the details of the deal, ask questions, sign investor documents, and wire in their funds.
As mentioned previously, investing in a REIT is a lot like investing in the stock market. Investing in REITs can be done with a relatively small amount of capital. This is attractive to many investors, and gives many people access to real estate investments that otherwise wouldn’t be able to invest.
Syndications typically have higher minimum investments, typically around $25,000-$50,000 or more. This means that investors will need access to large amounts of capital in order to be able to invest in most apartment syndications.
Liquidity is one of the biggest benefits of investing in a REIT. Real estate is known to be a risk-adjusted asset, but it is traditionally illiquid. This means that you can’t simply cash out on your investments, and the process can take weeks or months to do through traditional real estate investing. REITs sell securities that are listed on global exchanges. This allows them to be purchased and sold the same way you would a stock. An investor’s capital is not locked away for a specific period of time.
When it comes to investing in an apartment syndication deal, an investor’s investment is illiquid. Since you are investing directly into the property, you cannot liquidate your investment. This is the same way buying your home would function. Most business plans require that the property be held for multiple years before investors are returned their investments with profit. Investors do typically receive cash flow distributions during the hold period. This is why you shouldn’t invest in an apartment syndication deal if you know you’re going to need that capital in the near future.
Investors in a REIT are taxed at a higher rate than most other investments. Dividends paid from a REIT are usually taxed at the rate the investor’s ordinary income is taxed, according to Sofi.com. This can be as high as 37% for the highest income earners. Even though you do receive depreciation benefits as an investor in a REIT, these are taken into account before an investor receives dividends. This means that REIT investors can’t use depreciation benefits to offset the income from their job.
A major benefit of investing in an apartment syndication is that you’re investing directly into a specific property. The passive investor is not an owner of the company that owns the property, like in a REIT. Instead, apartment syndication investors own part of the property itself. Because of this, passive investors receive tax deductions such as depreciation. Depreciation allows an investor to deduct the value of an asset over time from their taxable income. If an apartment property qualifies for accelerated depreciation, the depreciation benefits can be significant for investors. Depreciation benefits can even be higher than the actual cash flow. This means that according to the IRS, the investor is showing a loss, even if the property is positive cash flowing. These paper losses can be used to offset the income you get from your job.
Investment returns vary depending on many factors. However, REITs have historically produced an average return of 12.87% per year. Many apartment syndication deals offer an average annual return of 20%. So, let’s say you had $100,000 to invest.
If you were to invest in a REIT that produces an average return of 12.87%, that means you’d make $12,870 per year in dividends.
If you were to invest that same $100,000 into an apartment syndication deal projecting a 20% annual average return over a 5 year hold period instead, you’d make $20,000 a year for a total of $100,000 at the end of the 5 year hold period.
So which one is better for you?
So, you may be asking yourself, Which option is better for me? Since everyone’s financial situation is different, it’s important to understand where you currently stand, and determine which one is better suited for you.
If you’ve got only a small amount of capital, like $7,000, a REIT is probably a better option than an apartment syndication.
If you want to be an actual owner of the property and not just of the company that owns the asset, an apartment syndication will be better suited for you. If you’re primarily interested in the tax benefits, apartment syndications are likely the right choice for you.
After reading about the differences between REITs and apartment syndications, you’re now in a better position to determine which one will make more sense for you. Make sure to analyze the benefits and drawbacks of both before deciding which one you want to place your hard earned money into.