What is the difference between a real estate syndicate and a REIT (real estate investment trust)? One is ownership of actual brick and mortar real estate, the other is a stock backed by real estate. REITs allow people to invest a small amount of capital in real estate and exit quickly but they are more volatile and offer fewer tax benefits. A real estate syndication is ownership of professionally managed real estate that produces cash flow, tax depreciation, and equity growth over time but requires a longer investment period using a larger investment amount. There are pros and cons to both options and depending on your investment goals, one or the other may be a better fit for your investment goals. Listen to this episode to determine the right investment strategy for you.
01:27 Benefits of Real Estate syndicates over REIT
03:41 Negatives of investing in real estate syndication
08:05 Real Estate Syndication vs REIT
10:37 Learn more at peoplescapitalgroup.com
Aaron: All right, ladies and gentlemen, welcome back to the Passive Cash Flow Podcast. I’m your host Aaron Fragnito. We have a new topic today it’s called Real Estate Syndication vs REIT or real estate investment trust. We’re going to talk about the difference between investing in the real estate syndication which is actually own brick and mortar real estate vs investing in a stock backed by real estate which is what a real estate investment trust is. We’re going to break that down today on the Passive Cash Flow Podcast.
Aaron: All right, so, first of all, what is a real estate syndication? We pool capital together that allows passive investors to own part of a large building and People’s Capital Group generally an apartment building that then produces cash flow for those passive investors, tax benefits and equity growth over time.
A joint venture is a little different where a joint venture you may have voting rights, you may have operating responsibilities day in and day out where with the real estate syndication you’re really a passive investor, you’re investing with experienced professionals and they’re going to be calling the shots day in and day out.
There are some risks to a real estate syndication over a real estate investment trust or a REIT and we’re going to break into that right now. The benefits of real estate syndicate over a REIT is that real estate syndicates tend to be less volatile. This is because they don’t follow the stock market. See, a real estate syndication is based on a specific property or a portfolio of properties and investors cannot go in and out of the investment so quickly like they can with a REIT.
Now, that’s a negative because it’s not as liquid, meaning you can’t take your investment out the day of or within 24 hours. There’s generally about a three to five year investment period with a real estate syndication that people have to understand that you’re invested for the long term and there’s benefits to that as well. The benefits are that real estate syndicates tend to be less volatile. The value of them does not go up and down like a REIT does because a REIT is just a stock backed by real estate.
See, when the pandemic came, REITs dropped by 80%, some of them. Now, of course, the real estate that was backing those stocks didn’t drop by 20% but there was a scare on the market and therefore stocks dropped by a lot. REITs are stocks backed by real estate so they dropped a lot.
Now, real estate syndications are not stocks backed by real estate, it’s actual ownership of a building or maybe a portfolio of buildings that are professionally managed by the sponsors or general partners. Now, this allows for less volatility. It also allows for another huge benefit over REITs, which is owning actual real estate even as a passive investor you still get the tax depreciation. The tax depreciation passes through the investors and that allows them to write off the cash flow and other profits on the real estate.
Now, when you want a stock that’s backed by real estate or a real estate investment trust, a REIT, it doesn’t offer tax depreciation. Now, there are certain privately traded REITs that offer tax depreciation but for this case for simplification matters, we’ll say that we’re talking about publicly-traded REITs versus privately owned real estate syndications.
Again, it’s not correlated with the stock market, the tax depreciation passes down to the investors and those are some of the benefits of investing in a real estate syndication.
Now, the negatives of investing in real estate syndication in comparison to a REIT is that it is a longer-term investment. See, there’s a nice benefit to being able to invest in a REIT in a stock backed by real estate today and pull it out tomorrow. Maybe I need that money back for something, maybe I just want to put it in for a little bit of time, get an 8% dividend and then pull the money out. That’s the benefit of investing in the stock market, it’s very liquid and that’s really nice thing to have.
However, being that liquid it does lead to more volatility with people pulling in and out of the investment more quickly which can affect the price more drastically. See, also another negative to being invested in a real estate syndicate is that you’re invested really in one market or one set of properties generally in one market. A real estate investment trust tends to be more diversified over a number of markets over a number of locations, a number of different types of real estate, and diversification is always key.
Now, a real estate syndicate can be diversified over a number of markets and a number of different types of real estate but generally, it’s focused on one property or package of properties near each other. Say a large apartment building that you’re investing in through a real estate syndicate.
Another negative of real estate syndicates versus a REIT is that REITs tend to produce more cash flow, stronger dividends. People invest in REITs for the dividends. In fact, they can be 8, 10, 12% sometimes. That’s really strong cash flow from real estate. Now that’s actually a dividend. The main thing is you can’t write that off. If you’re earning a 10% dividend on a stock, you’re going to pay taxes on those gains.
Now, remember if you’re earning 10% cash flow on real estate, which is a pretty aggressive cash flow, you’re not generally going to earn that but if you were, then your tax appreciation would ideally write off a lot of that cash flow. REITs don’t offer those tax benefits but they do offer really strong dividends and that’s why people enjoy investing in REITs for those quarterly dividends.
Now, real estate investment trusts tend to be backed by all different types of real estate throughout the country. I really like the fact that you can invest in office space, in warehouse space, in apartment buildings. You may be a mutual fund that owns a number of REITs so diversification really is key when investing with a REIT. It’s also easy to get started.
A benefit of a REIT is you can invest small amount of capital $500, $1,000. It’s a stock, so you can invest a very small amount and get started. Where with a real estate syndication you’ll generally need about $25,000 to $30,000 to get started, so it’s for more experienced higher-level investors investing in a real estate syndication.
Historically real estate syndicates have done very well. Equity growth has been stronger than dividend payouts. See, in my opinion, the real money in real estate is in equity ownership. Seth and I bought a number of properties around Rutgers University in downtown Newark area eight to ten years ago and the equity growth has been phenomenal. Cash flow is nice but cash flow is minute. It comes in it goes out. Really the buildings we own make enough cash flow to cover all their costs and a little bit at the end of the quarter but generally, the main returns we make on our properties is through equity growth. We love equity growth.
Not only can it be huge over time and extremely profitable but also equity growth you can harvest it with a tax-free strategy through the refinance. You don’t have to sell the building, you can refinance the building, harvest that equity growth, and not pay taxes on that income as long as you’re not exiting the investment. That’s a benefit REITs don’t have.
See, if you’re in a REIT and it does very well equity wise and you sell the stock or you even cash out some of your gains, you’re going to be hit with capital gains tax on those gains, so you want to make sure you understand that when investing in real estate actual brick and mortar owned real estate that’s owned through a real estate syndication, those tax benefits, those pass-through tax depreciation can be huge and over time it can make a very big difference. Especially if you’re doing well on your investments which is the whole plan of course, that tax depreciation offered in real estate syndication can really outweigh any of the dividend benefits offered in a REIT. Always focus on how much money you’re keeping not just what you’re earning.
We talked about volatility. Do you have a stomach for volatility? Then the REITs may be where to go if you’re looking to avoid volatility and you don’t really care about liquidity getting your money back tomorrow, having the ability to get back quickly if you need it. If that’s not important to you then real estate syndication is going to make a lot of sense for your investment goals.
Keep in mind we have a higher minimum investment amount, so if you’re looking to just dip your toe in the water with a couple of thousand dollars or so, a REIT may interest you a lot more, a real estate syndicate is really not an option with a very small amount of money. However, investing in a real estate syndicate there are more legal documents to review. There’s a little more due diligence, although that’s really the operator’s responsibility is to complete the due diligence but there is generally more paperwork to sign and review when investing in a real estate syndicate because you’re actually getting ownership of a property where REIT is just a stock backed by property.
Which one should you invest in? What’s the best fit for your investment goals? I can’t answer that without talking to you, understanding how much capital you’ve invested in either one, your goals over the next 5 years, 10 years, 15, 20 years. Once we figure that out we can figure out is a REIT a good investment for you? Is a real estate syndication a good investment for you? Do you want to witness the power of equity ownership and accelerating that wealth over time by really owning well-managed real estate in high-demand markets?
See, that’s what we focus on at People’s Capital Group. We have a long-term mindset. We’re helping people invest for the future and we like the fact that it’s a long-term investment that limits volatility, that limits people jumping in and out on the investment, that sets a strict plan for what we’re going to do with capital, the timeline is invested, and how we’re going to produce returns for our private investors through that time period and, ideally, hit a nice climax there with a refinance or sale of the property down the road. So you want to be aware of your investment goals anytime you’re investing. You really, at the end of the day, want to be a little diversified. Have some money in the stock market, have some money in REITS, have some money in a real estate syndication backed by professionally managed real estate in a highly managed market with good operators that know exactly what they’re doing.
If you’re invested well, invested wisely, and diversified over a number of markets with different operators and knowing that you have your capital with the right operators, then ideally you could sleep soundly at night and create a ton of wealth over time if you’re patient and invest wisely.
If you want to learn more about our investment strategy at People’s Capital Group, go to our website peoplescapitalgroup.com, enjoy our free content. We have webinars every month, we’ve podcasts every week, we’ve tons of articles and past webinars you can review as well and you can learn more at peoplescapitalgroup.com.
When you’re ready, fill out an application to join our investor group. Hopefully, you’re qualified. As I said earlier, real estates syndicates are limited to working with qualified investors but to find out if you’re qualified, go to peoplescapitalgroup.com, click the button qualify to invest, fill out a qualification form, we’re going to review it and get back to you, and, hopefully, you do qualify to invest in our real estate syndication which is a great way to build your wealth over time and earn passive cash flow as well.
Hopefully, you learned something here with our episode of REITS vs real estates syndications and if you want to learn more, go to our website there. Enjoy your day. Thank you.