Investing into a REIT - What You Should Know
by Christopher Levarek
The more that you read, the more things you will know. The more that you learn, the more places you’ll go.
- Dr. Seuss
So you want to invest into real estate? If you are like many who prefer passive investment instead of actively being the landlord and managing tenants, toilets and termites, this article will help.
In a previous article, we discussed some other forms of real estate and syndication. One of these was a REIT. It is a common jump for many investors when looking for an alternative to stocks as it is a similar easy to access investment model. Let’s revisit the intricacies of a REIT and how it measures up to investing passively into a real estate syndication.
A REIT - What is it?
At it’s base, investing in a REIT is simply owning stock in a company that invests into commercial real estate. So rather than investing into a stock of say, Apple, which sells products/services, you are invested into a company that buys/sells real estate. It is important to note this is an investment into a company.
Does this mean you are invested into apartments or physical assets you can go visit or see and understand? Not quite.
Let’s look at the differences between syndications and REITs.
6 Differences between REITs and Real Estate Syndications
Difference #1 : Layers of Ownership
As mentioned, investing into a REIT is purchasing stock shares into a company. The company may own real estate, however you are only purchasing shares of the company, not the real estate typically.
In a syndication, investors are often directly contributing their investment to a certain property with specific ownership in that entity (an LLC) that owns the property. So there is a direct line to ownership of property.
Difference #2 : Price of Entry
Since an investment into a REIT is like buying stock, the barrier to entry is quite low. The investment minimum can range from a few dollars or even a few hundred dollars and up, depending on the REIT.
On the other hand, syndications quite often will have a higher investment minimum, around $50,000-$100,000. This is often to meet the higher capital needs of a real estate project as well as ensure alignment with the partners on the project.
Difference #3 : Asset Count
A REIT invests into a portfolio of properties in a range of markets. This portfolio can also be across a great many of varying asset types such as storage space, mobile home parks, apartment complexes, commercial offices, etc. This offers the investor great diversification as their capital is widely spread.
Real estate syndication on the other hand is typically focused on one single property in a single market. An investor would have a good understanding of the exact property, unit count, location, build type and financials associated with the property. The business plan for how the investment will function is presented up front before investment for that singular project or property.
Difference #4 Access
REITs are found on all the major stock exchanges and thus an investor can invest directly into these vehicles using normal stock investment platforms. You could evenly use mutual funds in a retirement plan if desired.
Alternatively, real estate syndication is regulated by the SEC with the most common forms being structured as 506b or 506c, see our article discussing these in great depth. All this means is that syndications due to regulation can not be publicly advertised for 506b type offerings. As the 506b offerings make up the majority of offered syndications, these offerings are harder to find unless an investor is already in an inner circle or group such as our Valkere Investor Club.
In addition, for those syndications that can be publicly advertised, 506c, the requirement is being an accredited investor which can be another investment hurdle for some.
Difference #5 Liquidity of Capital
In a REIT, you can buy and sell your shares fairly rapidly just like other stocks. Your capital has liquidity, or in other words “the speed at which you can deploy or retrieve” said capital.
In a real estate syndication, the general model requires a capital investment of 5 years typically. Some will be shorter around 3 years and others can be more long term at around 10 years. The lifecycle of the deal is built around a business plan to raise the income and value of a property which takes time. Thus an investor’s capital is typically invested for that term.
Difference #6 Taxes
Investing into a REIT does not have the same tax benefits as a traditional real estate syndication. Since an investor in a REIT is investing into a company and not investing into a property directly, the depreciation or paper loss on the asset can be quite different. Often these depreciation benefits in a REIT are realized prior to dividend payouts and not passed to the investor directly.
In addition, the dividends received are taxed as ordinary income and thus add to the tax bill of the investor, not decrease it.
On the other hand, in a real estate syndication, investors are able to greatly reduce their tax burden. This is probably one of the most beneficial parts of investing into syndications. Since the investor is invested into a property directly, the depreciation (the writing off the value of an asset over time) is passed onto the investor.
This typically means that the investor although making a positive return from cashflow actually shows a paper loss on their tax return from the investment. The savvy investor can even ensure this depreciation is factored against ordinary income such as that coming from an employer(see our article on this very subject for more on this).
In Final
So REITs or Syndications?
It’s up to you! There is no wrong or right answer, simply what works for you and your current finances. If you find you only have $500-$1000 to invest, perhaps a REIT is a better choice. If you have the need to decrease your tax burden and want more direct visibility with the real estate project, perhaps syndications are the better choice.
In the end, investing whether in REITs or syndications will be choosing the asset of real estate and ultimately ensure you progress towards your goals.