As a passive real estate investor who likes to invest on a larger scale, it is important to understand your options. Two popular choices by passive investors are real estate syndications and real estate investment trusts.
REIT– A company that owns, operates, or finances income producing real estate. Investors receive cash flow in the form of dividends much like a stock.
Apartment Syndication– The general partner (GP) pools together capital from limited partners or (passive investors) and share the profit of cash flow and sale proceeds.
Both forms of investing passively will check the box for owning real estate, however, because of how they are structured, they are not considered equal. Here are 6 points to think about before making your next real estate investment.
#1 Liquidity
One of the major benefits of investing in a REIT is the ability to pull out your investment fairly quickly if needed. Since a REIT is designed like a stock, it is more flexible in that you can buy in and sell out of that REIT. On the flip side, investing in an apartment syndication requires you to be in the investment for the life of the business plan. Depending on the syndicator and how the PPM is constructed, there may be some ways to get your capital back in an emergency. However, when making your investment you should be prepared to have it invested for the life of the project.
#2 Initial Investment
With a REIT you are able to buy in at a relatively low cost, much like stocks. This means you can be invested in a REIT for around $1,000. Apartment syndications typically require much more capital to be part of. They can also require you to have an accreditation status. This means you earn 200k as an individual, 300k if you file jointly, or 1 million dollars of net worth not including your primary residence. To determine if you are an accredited investor or not, click here. Some sponsors will take non-accredited investors, but typically keep a high minimum investment. For example, my company has a minimum investment of $50,000.
#3 Ownership
When investing in an apartment syndication you have direct ownership in the asset. With a REIT you are buying shares of equity and do not have direct ownership. One huge advantage to investing in an apartment syndication is having access to the general partnership (GP). You will also receive updates, pictures, and financials frequently from the GPs. Lastly, you can give the GPs a call at anytime during the investment to gain clarity on any questions you may have. With a REIT, there is no guarantee of ever talking to the company in charge of the portfolio.
#4 Diversification
When you invest in a REIT your money is spread across a portfolio of assets. This allows REITs to have less fluctuation in returns from year to year. With an apartment syndication, your investment is 100% with that asset. This can be a good or bad thing. If the property is doing poorly, your return is greatly affected. On the other hand, if the property performs above and beyond expectations, you get to reap the benefits. You can however, create your own style “REIT”. For example, say you have $1,000,000 to invest. You could invest $100,000 in 10 different properties with 10 different general partners in 10 different markets.
#5 Returns
The biggest advantage you get when investing in an apartment syndication is the higher average returns. REIT returns over the last five years have been 25% (2013-2018). This includes dividends and distributions. For example if you invested $200,000 in 2013, you would now have $50,000 in total profit. On the contrary, my company does not invest in deals lower than an 8% average annual return and 15%+ IRR to our passive investors. If you were to invest in one of our deals at these returns, your total profit would be $175,000. This does not include a possible refinance, which is a nontaxable event, or the cost segregation strategies we utilize in our business plan.
This is the power of investing in apartment syndications! Ultimately, your goal is to put your money to work in a risk adjusted asset. If both offer the same stability, why not get the most out of your money?
#6 Taxes
REITs and Apartment syndications both have pass through tax depreciation to the passive investor. Where there is a major difference is the power of the 1031 exchange. When the general partner is done with the business plan and is selling the asset, the limited partner is able to use the 1031 and reinvest his proceeds into another investment with that syndicator. Doing a 1031 allows you to defer your taxes on profits at sale. There is immense power in utilizing a 1031 to grow your wealth exponentially. You cannot capitalize on this if you invest in a REIT.
In summary, both REITs and Apartment syndications offer historically better returns than stocks, mutual funds, and bonds. Investing in an apartment syndication is a far superior method to creating wealth than a REIT, as long as you are prepared to have your capital invested for 5-10 years.
