What are the differences between a publicly traded REIT (Real Estate Investment Trust) and a Real Estate Syndication? Find out today on the Passive Cash Flow Podcast.
Also why is the cash out refinance the best way to manage your real estate portfolio? We cover that and more today on the Passive Cash Flow Podcast.
The Passive Cash Flow Podcast is for beginner or experienced investors. Learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow!
Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit www.PeoplesCapitalGroup.com to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA’s and 401K’s are accepted.
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Aaron Fragnito: All right, ladies and gentlemen, welcome back to the Passive Cash Flow. This is podcast episode number 13. This episode is about a real estate syndication versus REITs. There’s a number of differences we’re going to talk about today. We buy apartment buildings here in New Jersey, we manage all the buildings for our investors, they get passive cash flow, they get awesome equity splits and big cash out refinances.
If you want to learn more about how you can earn passive cash flow through New Jersey properties, New Jersey apartment buildings go to people’scapitalgroup.com and input your information. We’ll get it touch with you. We’ll talk to you more about how you can qualify to invest passively in New Jersey apartment buildings. Guys, let’s talk today about real estate syndications versus REITs, what’s the difference. The difference between a real estate syndication, which we hear a lot about, and REITs.
Real estate syndication is when you pull together capital from a number of investors, it would be one to generally 35 investors, and you buy a building or a number of buildings. You can create a fund and that fund can go and buy one building. As we do, we start a small fund for every building. In our situation here at People’s Capital Group in our syndication or syndicate we have a new small fund for every building. We do small apartment buildings and we have a new LLC and a new fund. The investors get a share of that LLC and invest in that fund for each building.
There’s other ways to do it as well. Other companies have one large fund that is then buying multiple properties and selling multiple properties at all times and whatnot and then renovating them. That’s another way to do it as well, and perhaps, one day we’ll move to that but for now what works best for us is a small fund for each building. There’s different ways to do that. I’ll probably do another video about how to keep your costs down when creating a small fund. The difference here now, a REIT is a stock. That’s a stock that’s backed by actual real estate.
That’s great because you can get in and out of quickly but there’s a lot more in benefits I feel to syndication than owning a stock that’s backed by real estate. First of all, real estate syndicates offer tax depreciation. At least ours does. There’s different ways to set them up, but for the most part, the majority of real estate syndicates mean you own a piece of an apartment building or a piece of real estate generally, commercial real estate, and because of that you get the tax depreciation from it. Because of that when you make cash flow on the real estate you are able to write off that cash flow.
In fact, on our buildings that we buy, our investors get more tax depreciation than they do cash flow. They’ll have extra tax depreciation, extra tax write-offs, they can go and utilize on other forms of business income, corporate income, LLC income not their W2 income but other forms of business income. A lot of our investors are house flippers. That makes it a $150,000 a year flipping houses. When they flip the house, if they make $100,000, that’s great but they owe about 25% of that to the government.
Now, if they invest in the building with us and they’re making $10,000 a year in cash flow but they’re getting $15,000 a year in tax depreciation, well, we’re going to be able to write off that full $10,000 of cash flow so they owe no income tax on that cash flow which is awesome. The more money you keep, the more money you make. It’s all about not giving your money to the IRS. Also, they have an additional amount, in this scenario, $15,000 of tax depreciation, $10,000 of cash flow. That means you get additional $5,000 of tax depreciation you can go use to write off other forms of business income. That’s awesome. That’s something you do not get with a REIT.
A REIT is a stock. Stocks pay dividends, REITs pay great dividends, they really do. I cannot fight that but at the end of the day REITs, that dividend is taxed. You might be getting a dividend of 1% to 2%, a quarter, that’s phenomenal similar to cash flow on real estate but it’s taxed. If you’re making good dividends that’s amazing but if you can make the same in cash flow by owning real estate and not get taxed on that cash flow, you use your tax depreciation to write it all off or get paid dividends and owe 25% of that back to the IRS.
Obviously, the better option is to be able to write off all that cash flow coming in or write off the dividends which you cannot do with a stock, with a REIT. Then, let’s talk about if your investment grows in value and you want to sell that investment, which is ideally what we want to do with all of our investments, harvest our growth and enjoy that wealth and move that wealth into a different area or just allow that wealth to grow. When you want to harvest that wealth there’s two ways to do so.
In real estate, when we own a building, we plan on doing a 1031 tax deference. That means we’re going to sell the building, we’re going to take all the proceeds from the sale of the building and put that in a third party, 1031 tax deference company, and then you have a certain amount of time to identify a similar building and you have the amount of time to close on that building. As long as it’s executed properly, then you can do a 1031 tax deference and you can defer any and all taxes owed at that point and defer that and move that forward into a bigger building so it allows you to buy a much bigger building.
The 1031 tax deference by selling a building, not owing any income tax at that time, keeping all the proceeds to sale the building, moving that into a bigger piece of real estate, trading up allows you to then leverage that capital four times over as you get a mortgage ideally 25%, 30% down. Now, as you save that money, you can buy a bigger building. Great scenario here would be let’s say you sell a piece of real estate, you make a million dollars.
Now, normally if you sell a stock and you make a million dollars in profit that’s phenomenal but you owe about 25% of that to the government income tax depending on your tax bracket, how you own the stock a lot but you owe some of that income tax to the government generally around 20% to 25%. Now, if you sell a piece of real estate and you make a million dollars and you do a 1031 tax deference correctly, you owe zero dollars income tax on that million dollars so you keep all that million dollars.
Now, it goes one stage better. You have to go buy another piece of real estate with that piece. Not only doesn’t it force you to be smart with that money and not go on vacation with it, it makes you go and retain it, continue to reinvest that wealth. That’s a good strategy there but also now you’re not paying tax on that million-dollar you just made. You can go and buy a bigger piece of real estate and you’re going to leverage that money, ideally, you make it a mortgage. That’s your 25% down.
If you have a million dollars, you could buy a four-million dollar building where if you sold a building and you made a million dollars and you didn’t do the 1031 tax deference and you gave $250,000 to the government well, now you only have $750,000 left to go buy that next building. You’re going to get about a 2.9 to $3 million building. In that scenario, obviously owning a 4 million-dollar piece of real estate is better than owning a 2.9 million-dollar piece of real estate and giving a quarter-million dollars to the government.
In this scenario obviously, the benefit of the 1031 tax deference allows you to grow your wealth exponentially. It’s how the rich get richer, it’s how the wealthier get wealthier. If you’re not executing the 1031 tax deference long-term with your real estate holdings, then you might not be doing it right. With stocks, if you sell a stock you do not get the 1031 tax deference and, of course, you get hit on income tax and capital gains. Also, you have the refinance option with real estate.
Now, you can borrow against your stocks. It’s certainly possible. We’ve had investors do that. We have a gentleman from Maryland that comes in and speaks about how to borrow against your stocks to then invest in real estate. You can get a pretty good interest rate on this. There’s lots of ways to do it. You can borrow up to about 50 to 60% of your stock portfolio as long as it’s a healthy stock, portfolio not like penny stocks but a sustainable stock portfolio and then you can buy real estate.
You can in a sense refinance stocks but with real estate it’s really how the game is played and in commercial real estate, the refinance is an amazing tool. Real estate continues to grow in value as long as it’s well maintained, continues to grow its cash flow over time. Because of that and also falls inflation real estate, it tends to just grow naturally over time as long as it’s well maintained. Even if you’re not in a hot spot we buy in good areas that grow because there’s a huge demand for them but even if you’re in a lesser market, real estate does hold its value and tend to grow over a long period of time.
The refinance option to not sell the real estate and lose that income, but to just refinance and harvest some of that equity is a phenomenal option. The interest rates right now are so low that you’re really getting that refinance cash at a ticker to above inflation which is about 2%. If you’re borrowing money at 3.5%, well you’re only 1.5% above inflation. That’s really phenomenal. You’re really almost getting free money. If you’re smart with that money, you use it to go invest in other assets, maybe more real estate where you’re earning more income.
That is a great way to take that wealth that has been created by natural market increases in maintaining your real estate over time and then harvesting it and moving it into another piece of real estate, another income-producing asset. We have the tax benefits of real estate syndications over REITs. Obviously, we have the ability to refinance really in both in different ways. That’s where there’s somewhat equivalent. What I like about actual tangible real commercial real estate is that it’s not going to drop overnight.
Values of real estate fluctuate, I’m a realist, okay. Apartment buildings are going up right now and there’s a huge demand for them. There might be a time where that slows down, that’s fine. That’ll give me a chance to buy some more affordable apartment buildings. Right now, if you’ve invested in the stock market, we’re all sitting here thinking like, all right, it’s been 10 years. All right, it’s 2011, 2012 was where the market finally hit bottom and started tapping up again, literally until the year 2011. 2010 when the market really started to hit that bottom point and it’s been 10 years, 8 to 10 years, the market cycle.
There’s probably going to be some type of stock market correction at some point or another. The fundamentals of American are phenomenal. The market’s extremely strong, economy’s extremely strong, GDP is great, unemployment’s super low, people are making more money than ever. The economy is great, I don’t think we’re going to get hit with any type of recession. The stock market does, what the stock market does and it’s going to go up and it’s going to go down and when it goes down, it goes down quick and when it goes up, it builds steadily over time and it has had a really good run.
At some point or another, stocks are going to correct and that happens quickly. You can like to go to bed and wake up and your REIT is worth a lot less than it was the night before. Your apartment buildings not going to do that. An apartment building, I’m buying one right now for 3.1 million, it appraised for 3.5 million. I’m not going to buy it and wake up the next day and it’s worth 1.5 Million. That’s not how apartment buildings work. It’s just not how the market moves. It doesn’t move that quick.
Now, 5, 10 years go down I’ve invested in completely the wrong market. Yes, you can lose value on your real estate especially if you don’t maintain it properly. We own our own management company, but basically your real estate values move much more slowly, slow is good. You want your real estate values to grow steadily over time, consistently over time and that means if they grow slowly and consistently over time, 6%, 8% a year, that means they’re not going to fall at that rate either. If you grow slow, you fall slow, but if you build fast with stocks, you fall fast with stocks.
I really enjoy that the value of my asset is not going to drop out, that scares the heck out of me with stocks and that’s why 99% of my own capital is in actual real estate. Okay, tangible, local real estate. I would like buying local buildings, I like being able to drive out to the buildings, look at them, show them off to my wife and my friends and family at this point. They’re like, yes, yes and yes why I don’t really care about your real estate anymore.
It’s nice to be able to show that to your friends and family. It’s nice to drive by yourself and look at the property. There’s my money at work, a nice, well-maintained apartment building with happy families living there and getting the American dream. A lot of areas we invest in are up and coming. Lena speaks Spanish and we’re bilingual here. We’re working with a lot of immigrants, so it’s really incredible. You give a nice place for people to live, you treat them right with respect, you improve a neighborhood, it feels good. It feels nice to do that with your capital. It’s a tangible effect, it’s a real effect, these are real people living real lives around the corner from us. They’re our neighbors, we want to respect them and help them and improve these areas. That’s nice to do that with your money.
It’s much different than investing in some REIT that’s invested all over the nation in Dallas and in California and Missouri and you’re never going to see the properties, your dollar really. You don’t really know which property it’s in or where it really, when it’s in some big conglomerate fund and it’s getting some dividend every quarter and it’s a number on a sheet. It’s very different than being invested in one, two, three main street, knowing 10% of that building and knowing your money turned that building over and made it a better place to live for people where the people living there are happier and healthier and safer and your money’s making a small difference in the world. That’s nice, it’s a nice feeling to have.
You don’t really get that with REIT in my opinion and that’s something I like with my own capital to see those changes and those improvements. Also, people invest in real estate to hedge against the stock market. Obviously investing in a REIT is not a way to hedge against the stock market. It is the stock market. Sure, it’s backed by actual real estate and real estate values and cash flow for that real estate, but you better bet if the stock market drops out, REITs are going to get hit too. They’d go with the flow stocks or stocks dow down.
Really to hedge against the stock market tangible apartment buildings in great markets like we buy in here in North Jersey is the right way to hedge against the stock market. There’s other ways as well, but that’s one of the ways to diversify your investment, which is the most important thing to do. We also feel that in a recession, rent is stable. Rent continues to grow, here in North Jersey, whether the market is hot or not, rent has been growing for years.
We have lines out the door to at least our units and because of that, the rent is very stable in high demand areas during a recession. Again, it’s more of a session proof to be invested in real estate syndicate. That’s well run in a good area where you’re going to have high demand rather than the REIT that just really spread out. I get that different market to different things and the idea is to spread out the risk over different markets.
Stock is so volatile in a recession that it’s really not recession-proof to be at a REIT during a slow time. I’d rather be invested in actual building in a good market here in North Jersey that’s well-maintained and making me money every quarter. If you want to learn more about how you can get invested passively in some local apartment buildings here in New Jersey, you don’t have to live in New Jersey. We work with tons of investors outside of the state, but most of our investors are from New York and New Jersey. Go to peoplescapitalgroup.com and fill in your information. We’ll get in touch with you. We can set up a time to meet and talk about one of our upcoming apartment buildings that we’re buying. Or you can come to one of our webinars or seminars here at the office. We do seminars about four times a month here at People’s Capital Group.
If you’re local, New Jersey here in Berkeley Heights come on by, check out one of our seminars. We have the schedule on our website, peoplescapitalgroup.com. Go to that website, sign up for one of our events and your information. We will contact you and get in touch and see if you qualify for one of our upcoming investment opportunities here in New Jersey, have a good day.
