OUR THOUGHTS: Syndications Compared to Other Real Estate Investments

There are no shortage of investment alternatives out there vying for your hard earned dollars. While we at DR Capital are big fans of the stock market and equity indexes, we're wary of having too much of our capital in a given asset class, especially after that asset class has risen substantially in value. Real estate and specifically residential real estate has proved to be a very resilient asset class with solid returns, significant tax benefits, built-in inflation protection and one which is not correlated to the stock market. There are a number of different ways to get exposure to this asset class, which I'd like to briefly discuss and compare here.

Direct Ownership

REITs

The primary differences between REITs and syndications include;

1. Liquidity- At any time, you can buy or sell shares of your REIT and your money is liquid. Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 5 years or more), during which your money is locked in. In exchange for this illiquidity, syndications typically offer a superior return.

2. Access - Most REITs are listed on major stock exchanges, and you can invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily. Real estate syndications, on the other hand, are often under an SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors.

3. Investment Minimum - When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few bucks. Thus, the financial barrier to entry is low. Alternatively, syndications have higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.

4. Returns - While returns for any real estate investment can vary wildly, the historical data over the last forty years reflects an average of 12.87% per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64% per year over that same period. A typical multifamily syndication deal will offer a return of between 14-19%.

5. Number of Assets - A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls, office buildings, elderly care, etc. On the flip side, with real estate syndications, you invest in a single property in a single market. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment.

6. Tax Benefits - One of the biggest benefits of investing in real estate syndications versus REITs is tax savings. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time). Often, the depreciation benefits exceed the cash flow. So, you may show a loss on paper but have positive cash flow. When you invest in a REIT, because you’re investing in the company and not directly in the real estate, you do get depreciation benefits, but those are factored in prior to dividend payouts. There are no tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.

7. Ownership - When investing in a REIT, you purchase shares in the company that owns the real estate assets. When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset.

Example Comparison of Returns