Adding real estate investment to your portfolio can help you diversify your holdings and increase your wealth. However, there are two primary strategies to consider when increasing real estate investments: reit vs real estate syndication. In recent years, the market has seen the emergence of a new asset class called Real Estate Investment Trust (REIT), which allows investors to get exposure to the real estate industry. They don’t need to invest in physical real estate and can do so by purchasing REITs. If you are looking to invest in real estate, it is essential to have detailed knowledge about REITs and real estate syndication.
Difference between REIT vs. Real Estate Syndication
Tax depreciation
Tax depreciation is among the finest advantages of real estate syndication. This deduction enables you to subtract a percentage of your investment from your taxes each year, which can result in significant tax savings. Unfortunately, while REITs also provide certain tax benefits, they often fall short of those real estate syndications provide.
Number of properties
There may be many distinct properties in a REIT investment portfolio. A higher number of properties listing offers investors an incredibly diverse portfolio. There are hundreds of other properties that can make up for one that is performing poorly. An independently syndicated transaction is, by definition, solely for one particular property. Because there are no additional properties to counterbalance underperformance, there is considerable diversification risk. The advantage is that syndicated real estate investors are aware of every expenditure of their funds.
Minimum investment amount
The sole need for a publicly listed REIT is the money required to buy at least one share. It may cost $100 or less. Private REITs and syndications may have substantially higher minimum investment requirements. The precise sum varies with every contract, although it frequently falls between $25,000 and $100,000.
Returns
The property, the management, and several other factors significantly impact the overall results for both syndication and a REIT. As a result, both investment kinds have the potential to provide very large returns or only average returns. There is, however, one crucial detail to keep in mind. Since returns for publicly listed REITs are influenced by variables other than the performance of the fundamental properties, they may be unpredictable. For instance, more general economic variables like unemployment, interest rates, or monetary policy might result in sharp changes in the stock market, and REIT values may be affected by these changes.
Tax Benefits
According to IRS regulations, REITs must distribute at least 90% of their taxable revenue to avoid entity-level taxation. This regulation results in a high dividend yield and offers tax savings to investors. In addition, syndicate investors also profit from various tax benefits. First, they are allowed to deduct running costs for the property from their taxes, including depreciation, which lowers the amount of taxable revenue that is distributed to investors.
The market’s selection of investment instruments has grown further due to the advent of REITs; for investors wishing to diversify their portfolios, REITs and real estate funds are both viable options. However, when making such a decision, an individual needs to know which one is better, REIT vs. real estate. Dividends from REITs may often offer a consistent stream of income. Contrarily, real estate syndication funds gain a significant portion of their value by appreciation, which draws long-term investors.