These days, there are several ways to diversify your investment portfolio. Additionally, instead of purchasing real estate and becoming a landlord, there are other options for those looking to invest in real estate. For instance, some investors decide to invest in real estate investment trusts (REITs). On the other hand, some people opt for a real estate syndication. If you’re wondering about these investment options and which is best for you, keep reading as we go over real estate syndication vs. REITs.
What are REITs?
REIT stands for real estate investment trust, a company that invests in income-producing real estate. There’s a significant difference between investing in a REIT and purchasing real estate first-hand. For instance, you’re investing in a company that will purchase real estate, so you don’t get much of a say in purchasing properties.
Like any other stock, most REITs are listed publicly on major stock exchanges. Investing in REITs is relatively easy since they are incredibly accessible, and you don’t need a ton of capital to get started. Additionally, you can buy more or sell your shares at any time.
Each REIT focuses on different real estate types, like apartment buildings, shopping centers, office buildings, and more. As such, if you invest in a shopping center REIT, then it will likely own and manage several shopping centers in several markets around the US.
Investing in a REIT is a great way to diversify your investment portfolio, and it doesn’t take a lot of time or money to get started. So next, let’s go over what real estate syndication is.
What is a Real Estate Syndication?
A real estate syndication, also known as crowdfunding, is essentially a private group investment involving other individuals working together toward a common goal. Unlike REITs, with most real estate syndications, you invest in a specific property in a single market. That said, you’ll own the property, you’ll know exactly where it is, and you’ll have more say over property management.
Typically, syndications have a sponsor(s) that initiate the investment by selecting the property, gathering funds, and executing the property purchase. The sponsor will typically form an LLC and then find investors to pool money into the project. Then, each investor will own a percentage of the building and earn profits from the investment.
When you invest in a real estate syndication, it can take a while to actually obtain the property. After all, you have to review the investment, sign documents, and submit closing costs. Additionally, it takes quite a bit of capital to get started with syndication, as most have high investment minimums.
Nevertheless, real estate syndications are a great way for investors to achieve long-term wealth and a more diverse investment portfolio. So next, let’s go over real estate syndications vs. REITs to see which is a better strategy for investors.
Which is Better? Real Estate Syndication vs. REITs
It’s hard to say which investment option is better since both have several pros and cons. However, both options allow investors to invest in real estate without becoming a landlord and directly managing properties.
The benefits of both investment options depend on what you’re looking for as an investor. Some of the main differences between real estate syndication vs. REITs are:
- Accessibility- Investing in REITs is quick and easy while investing in real estate syndications could take more time and effort.
- Investment Minimums- You don’t need a large amount to invest in REITs, but a down payment for a real estate syndication will be quite significant.
- Tax Benefits- Directly investing with real estate syndication poses several tax benefits, like write-offs, while REITs don’t provide as many benefits.
- Liquidity- REITs keep your investment liquid, while a real estate syndication does not.
Now that we’ve gone over some of the differences let’s go over the advantages and disadvantages of REITs and real estate syndications.
Advantages and Disadvantages of REITs
Real estate investment trusts have several pros and cons. Here are the significant benefits and disadvantages for those looking to invest in a REIT.
Benefits of REITs
- REITs are highly accessible and easy to purchase, frequently only taking a few minutes.
- You don’t need a large amount of money to get started with a REIT investment. In fact, even if you have $100, that’s enough to invest.
- REITs keep your investment liquid, so you can buy or sell shares whenever you choose.
- Real estate investment trusts can offer large returns for intelligent investors.
Disadvantages of REITs
- With REITs, you don’t get as many tax benefits. While you still get the benefits of depreciation, they’re factored in before you get profits, so you don’t get any more tax breaks.
- The potential returns for REITs are much smaller than they are for other investment strategies, like real estate syndications.
- When you invest in REITs, you don’t actually own anything. Instead, you’re investing in a company that owns real estate.
- Unfortunately, you may not know exactly where your investment is going since REITs have multiple projects.
Advantages and Disadvantages of Real Estate Syndications
Like REITs, real estate syndications offer tons of advantages and disadvantages for investors as well. Continue reading to learn the main benefits and disadvantages of real estate syndications.
Benefits of Real Estate Syndications
- You and your investment partners have direct ownership of the property.
- Real estate syndications offer tons of tax benefits, including depreciation and deductions.
- You don’t have to personally manage properties; instead, you can hire property management services in Northern Virginia.
- Typically, real estate syndications see higher returns than other investment strategies. For instance, most investors look for around 20 percent average annual returns.
Cons of Real Estate Syndications
- You need a significant amount of capital to get started with a real estate syndication. Often, the minimum investment amount is $50,000.
- Investors can’t buy and sell syndications with the click of a button. Instead, it can take several weeks for the process to close.
- Many real estate syndications are under SEC regulations, prohibiting public advertising for investment opportunities. As such, to find one, you often have to know someone already involved in a real estate syndication.
- Investing in syndications means your money is locked in for a certain amount of time, so you can’t sell or take out profits whenever you choose.
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