Notably, many investors will start to look into investing in apartment syndications or real estate investment trusts (REITs). However, investors should keep in mind that there are several differences between the two, some of which we will discuss below.
What is an Apartment Syndication?
An apartment syndication is a partnership between multiple investors who use their skills and resources to purchase properties. Typically, investing in apartment syndications allow investors the opportunity to invest in pricier real estate deals that they normally would not be able to afford alone.
What is a REIT?
A real estate investment trust (REIT) is a business that invests, manages, and oversees income-generating real estate. Specifically, REITs invests in all types of real estate, including multifamily apartment buildings using the funds from multiple investors. Investors who participate in REITs receive their income/profit in the form of dividends.
Below, we will compare and contrast apartment syndications and REITs to help you determine if either is a fit for your investing goals and risk tolerance.
Ownership Structure
When you invest in a real estate investment trust, you are technically acquiring shares in a company, similar to purchasing stock. As such, you do not actually own the property that you invest in. Instead, you own shares in the REIT that owns the actual asset.
On the other hand, with real estate syndications, you are investing directly in an investment property. Additionally, you will own a percentage of the Corporation or LLC that owns their investment property. In other words, you and other investors have direct ownership of the asset, which is not the case with a REIT.
Assets
As previously mentioned, investing in a REIT means that you are investing in a firm that owns an investment portfolio comprised of various properties in different markets. For the most part, the portfolio will be focused on one asset class, such as apartment buildings, healthcare facilities, shopping malls, etc. This means that when you invest in a REIT, you don’t have the luxury of selecting what properties you invest in.
On the other hand, when you decide to invest in apartment syndications, you typically invest in one property in a specific market. Before committing to a deal, you will receive all the necessary information to make an informed decision. Specifically, you will know where the property is located, the projected financials about the property, the sponsor’s business plan for the property, and so forth.
Manner of Investing
REITs can be bought and sold on major stock exchanges similar to other public stock. As such, since they are publicly available, investors can find them easily. For example, investors can invest through mutual funds. With that being said, you can invest in a REIT in the next 30 to 45 minutes if you have a little time.
Investing in a real estate syndication is quite different. And for the most part, it is a little bit more challenging than investing in a REIT. Specifically, the real estate said vacations are governed under SEC regulations, and most offerings are not allowed to be publicly advertised. Therefore, to take advantage of a real estate syndication, you must have a relationship with a firm or individual that offers such investments.
Liquidity
Since REITs are listed on the major stock exchanges similar to stocks, they are a fairly liquid investment. Specifically, you can invest in REITs anytime that you want. On the contrary, investing in apartment syndications are illiquid investments. Think of syndications the same way as purchasing a home. You can’t just click a button and sell a home. Even the quickest sales will typically take at least 2-3 weeks to complete. In any event, when you invest in syndication, you can expect your money to be tied up for at least three years, if not longer.
Returns
Before you can compare the various tax benefits between REITs and Apartment Syndications, you must first understand how investors receive their income. Specifically, investors in a REIT receive their divided earnings from the net income, which typically means a lower payout.
On the contrary, when it comes to apartment syndications, investors receive their income before depreciation is deducted.
Tax Benefits
The generous tax benefits offered by the Internal Revenue Services are one of the reasons that people invest in real estate. However, when you invest in REITs, you are not investing in physical real estate. As such, you are unable to take advantage of the many generous tax benefits, and your income is taxed as ordinary income. This typically means that the investor should be prepared for a higher tax bill.
Specifically, as it pertains to the valuable tax deduction of depreciation, investors in REITs don’t get to deduct depreciation directly on their taxes. Instead, depreciation has already been taken out before the investor receives their dividends. This means that depreciation will not be able to be used to offset other income.
Overall, since you are investing in a company and not physical real estate, the tax benefits are not as great compared with investing in a real estate syndication.
Which is better, a REIT or an Apartment Syndication?
The truth is neither is better than the other. It’s really a matter of which fits your investing goals, criteria, and risk tolerance. However, the significant tax benefits of investing in an apartment syndication is a huge benefit for most investors.
