7 Differences between REIT and Apartment Syndication

Is a REIT the same thing as an apartment syndication?  Should I invest in a REIT or an apartment syndication?   Does it really even matter which one I invest in?

If you are like most of the optometrists we speak with about apartment investing, you may have these same questions.  A REIT is a pretty common term used in the investing world, whereas apartment syndications are less commonly discussed.  We’ll get to the reason why in a bit, but before we do that it may be good to define REIT.   A REIT is a Real Estate Investment Trust.  Essentially, it operates like a company that owns and operates multiple real estate assets across multiple markets.   The REIT sells shares of itself to investors, who then are paid a portion of operational profits.

While that may sound a lot like a syndication, let’s review 7 key differences between REITs and apartment syndications

Asset Specificity

REITs typically hold multiple assets across multiple markets.  When you invest in a REIT, you will not get control over the specific market or asset in which you are purchasing equity.  While this type of blended exposure may be appealing for some investors, other individuals may want more control to pick and choose the exact property and market in which they invest their money.   As a contrast, an apartment syndication is an investment in a single property.  Investors will know everything about the asset, market and return projections prior to making the investment.  If an investor wants to have equity in a Class A property in the southeastern U.S., they can find a syndication that meets that objective.  Most of our investors like this level of control over where their money is placed.

Investor Access

REITs are most often publicly traded, whereas apartment syndications are private access only.  In general, any investor can purchase shares of a REIT via the stock market.  As such, they are more accessible.  Due to federal restrictions, apartment syndications are much more private in nature.  In fact, many apartment syndications cannot publicly advertise their offerings (with some exceptions).   Essentially, investors must be invited to invest in a syndication by way of some existing relationship with the operator of that syndication.   Most of our investors come to us through our articles or our efforts to educate optometrists about the benefits of syndications. Only once they register, are we able to evaluate and determine whether to invite them to invest in our offerings.  While the regulatory hurdles can be a nuisance, in some ways it’s a good thing to build ongoing relationships with a smaller group of individuals—making syndications more of a bespoke real estate investment.

Ownership

When you invest in a REIT, you are buying shares in the REIT or company itself.  There are advantages to that type of ownership, which I’ll address in the next section.  When you invest your money in an apartment syndication, you are actually purchasing equity in a specific property.   Beyond the intentionality of ownership, there are tax advantages which I’ll touch on below.

Liquidity

REIT investments are liquid.  Because you are buying publicly traded shares in the REIT, you will always have the ability to sell those shares if you need the personal liquidity.  For those investors who have general liquidity issues, REITs hold a clear advantage in this regard.  That is because apartment syndications are illiquid.  When you invest in a syndication, you receive equity that is not tradeable.  There is no secondary market on which to sell your syndication equity.  Most often you cannot redeem, or get a refund for, your equity before the end of the syndication.  Investors in apartment syndications must be comfortable with knowing their investment is illiquid over the life cycle of the syndication.

Investment Minimum

Point of entry to a REIT can be very low.  Given that shares in REITs are publicly traded, investors can choose to invest small amounts of capital if they wish.  However, the minimum investment into an apartment syndication is higher.   While there are syndications that have $25k minimums, it’s far more common to see $50-100k as the smallest allowable investment.  

Tax Advantages

One of the most attractive aspects of real estate investing is the tax advantage.  Operating rental real estate allows the owner to expense depreciation of the asset in such a way that oftentimes offsets the tax burden that would have accrued due to the cash flow distributions.  With REITs, it’s the REIT itself that gets that benefit.  That allows the REIT to pass along those benefits to the investor in the form of distributions.  However, dividends and distributions are most likely going to be taxed at normal income tax rates.  Apartment syndications are much different in this key area.   Because investors in a syndication are directly buying equity in a specific property, they will receive schedule K’s in which the depreciation is directly applied.  This means each investor in a syndication is reaping the direct tax benefits of depreciation.  In many syndications, investors could receive paper losses even though they received cash distributions because of the power of accelerated depreciation.  (As always, please consult your CPA and tax advisor on your particular tax situation).

Returns

Over the last 40 years, historical data shows that exchange-traded REITs have an average annual return of 12.8%.   To compare, stocks in that same period returned an average of 11.6%.   If you invested $100k, this would mean returns of $12,800 and $11,600, respectively.  However, the average apartment syndication on a five year hold returns around 20% annually (when you consider the cumulative returns of distributions plus profit from the sale of the property).

At the end of the day, however, investing is not one-size-fits-all.  Each investor should evaluate these differences within the context of their overall investment strategy.  We obviously are passionate about bringing apartment syndications to all of our optometric colleagues.  But, we encourage every investor to consult their advisors and come to the decision that is best for them.  When you are ready to learn more about apartment syndications, we are here to help.  Be sure to register with us by clicking here and we can set up a 20 minute consultation call to see if your objectives align with our opportunities.