If you're looking for a way to invest in real estate and enjoy the benefits of passive income without the headaches of being a landlord, you've probably considered investing in REITs (real estate investment trusts). But are they really as good as investing directly in real estate assets? In this article, we'll delve into the ins and outs of REITs, compare them to real estate syndications, and help you find the best fit for your investment goals.
What Is a REIT?
A REIT is a company that invests in income-producing commercial real estate. It's like investing in an apartment building, right? Well, not exactly. Investing in REITs versus investing directly in real assets involves some major differences. Let's explore the seven biggest differences between REITs and real estate syndications, so you can make an informed decision.
Difference #1: Number of Assets
REITs typically hold a portfolio of properties across multiple markets, focusing on specific asset classes like apartment buildings, shopping malls, or office buildings. Investing in a REIT allows you to diversify your portfolio, but you don't have control over which properties the REIT invests in. On the other hand, real estate syndications often involve investing in a single property in a specific market. You have complete transparency about the property, its location, and the business plan.
Difference #2: Ownership
When you invest in a REIT, you're buying shares in a company that owns the real estate assets. You don't have direct ownership of the underlying properties. In contrast, real estate syndications allow you to invest directly in a specific property. You become part-owner of an entity, typically an LLC, that holds the asset. This provides you with direct ownership and more control over your investment.
Difference #3: Access to Invest
Most REITs are listed on major stock exchanges, making them easily accessible for investors. You can buy REIT shares directly or through mutual funds and exchange-traded funds. On the other hand, real estate syndications can be harder to find, as many are not publicly advertised due to SEC regulations. You'll need to connect with someone who has a deal you can invest in. Investing in a real estate syndication typically involves a longer process of reviewing the opportunity, signing legal documents, and sending in funds.
Difference #4: Investment Minimums
Investing in a REIT can be done with a small amount of money, as you're purchasing shares. Some REIT shares can be as low as a few bucks. This makes it appealing to investors who are just starting with real estate investing. On the other hand, real estate syndications often have higher minimum investments. Minimums can vary, but they generally range from $10,000 to $100,000 or more. Investing in a real estate syndication requires more capital.
Difference #5: Liquidity
REITs offer liquidity, similar to stocks. You can buy or sell shares at any time, and your money is not locked in for a set amount of time. Investing in a real estate syndication, however, means investing directly in a property. Just like buying a home, it's not as simple as clicking a button. The business plan for a real estate syndication usually involves holding the asset for a certain period, which means your money can become illiquid for a specific time.
Difference #6: Tax Benefits
One of the advantages of investing in real estate is the tax benefits it provides. When investing directly in a property, you can enjoy various tax deductions, including depreciation. These deductions can be significant and even offset other income. REITs offer some tax benefits, including depreciation, but these are factored in before you receive dividends. Dividends from REITs are taxed as ordinary income, which can lead to a larger tax bill.
Difference #7: Returns
Returns vary for each investment, but historically, exchange-traded U.S. equity REITs have averaged an annual return of 12.87 percent. This is slightly higher than the average return from stocks, which is 11.64 percent. Real estate syndications, on the other hand, typically aim for higher returns, often exceeding an average annual return of 20 percent. The combination of cash flow and profits from the asset's sale can result in significant returns.
Choosing the Right Investment
Ultimately, the best investment choice depends on your personal goals and preferences. If you have a smaller amount to invest and prioritize liquidity, a REIT might be a good option. If you have more capital to invest, value direct ownership, and seek tax benefits, real estate syndications could be more appealing. Remember, you can also diversify your investments by starting with a REIT and later investing in real estate syndications or vice versa.
Want to Learn More?
If you're interested in delving deeper into passive real estate investing and building true wealth for your family, we invite you to join the Goodegg Investor Club. This community provides valuable insights and resources to help you navigate the world of real estate investing successfully.
Investing in real estate, whether through REITs or real estate syndications, can be a rewarding journey towards financial freedom. Consider your goals, weigh the pros and cons, and make an informed decision based on your unique circumstances.