If you’re a tech employee who wants to create passive income to rediscover your true entrepreneurial calling, you might find real estate investing intriguing – except for the part about slaving away as a landlord. The thought of handling unexpected plumbing issues in the middle of the night is not exactly a thrilling prospect for most, myself included.

Luckily, there are other options to consider. Many investors move on to explore real estate investment trusts (REITs) as a logical next step. These are similar to stocks and are relatively easy to access. However, it’s important to note that REITs come with some downsides when compared to actual real estate investing.

What is a REIT?

When you invest in a REIT, you’re buying stock in a company that invests in commercial real estate. So, most people naturally figure, if you invest in an apartment REIT, it’s the same as investing directly in an apartment building.

Here are the 7 biggest differences between REITs and real estate syndications:

Difference #1: 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.

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. 

Difference #2: 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. 

Difference #3: Access to Invest

Most REITs are listed on major stock exchanges, and you may invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily online.

Real estate syndications, on the other hand, are often under an SEC regulation that prohibits public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. An additional existing hurdle is that many syndications are only open to accredited investors.

Difference #4: Investment Minimums

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 monetary barrier to entry is low.

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.

Difference #5: Liquidity

At any time, you can buy or sell shares of your REIT and your money is liquid.

Each real estate syndication has a business plan that defines how long you hold the asset (often 5 years or more), during which your money is illiquid.

Difference #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 like depreciation (i.e., writing off the value of an asset over time).

Oftentimes, the depreciation benefits can surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like from your current W2.

When you invest in a REIT, because you’re investing in the company and not directly in the real estate. You do receive 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.

Unfortunately, dividends are taxed as ordinary income, which can contribute to a larger, rather than smaller, tax bill.

Difference #7: 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 percent per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64 percent per year over that same period.

This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is a great ROI.

Between the cash flow and the profits from the sale of the asset, real estate syndications can offer around 20 percent average annual returns.

As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may make $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over the course of those five years.

Conclusion

So, which one should you invest in?

All in all, there’s no one best investment for everyone (but you knew that, right?).

If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have a bit more available and want direct ownership, want to be able to talk to the sponsors directly, and want more tax benefits, a real estate syndication may be a better fit.

And remember, it doesn’t have to be one or the other. You might begin with REITs and then migrate toward real estate syndications later. Or you might dabble in both to diversify. Either way, investing in real estate, whether directly or indirectly, is forward progress.

Next Steps

Here at Gen+ Capital, we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits. 

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