If you’ve been thinking about investing in real estate for a while, you’ve likely found that there are many different avenues to pursue. You could buy and operate a rental property, get into house “flipping,” or, if you’d like to be less directly involved in the operations, look for a more hands-off alternative. You may have come across REITs while doing your research, as well as real estate syndications, such as what we do here at Belrose.

This could lead you to wonder what the difference is between investing in REITs and pursuing an investment opportunity with a syndication partner. Let’s take a look. 

Understanding REITs

A REIT, or a real estate investment trust, are companies that either own, finance, or operate real estate that’s meant to generate income (such as commercial properties, apartment buildings, shopping centers, etc.). It pools together funds from multiple investors, who then receive dividends generated from the properties.

REITs follow a similar format to mutual funds, since they combine capital from multiple investors to buy shares of real estate. Each investor then receives income back based on their shares. Unlike a mutual fund, however, a REIT is held to certain requirements, such as paying investors at least 90% of its annual taxable income in the form of shareholder dividends.  

REITs are SEC-registered companies and most are publicly traded. This is an important distinction to make — some investors mistake REITs for being non-correlated assets. But in reality, they’re just as susceptible to market volatility and global events as traditional stocks. 

Types of REITs

REITs fall within three categories:

• Equity REITs: Own and operate real estate with the intention of producing income.

• Mortgage REITs: Loan money to property owners in the form of a mortgage or other type of real estate loan. A mortgage REIT may also acquire mortgage-backed securities.

• Hybrid REITs: These companies combine the traits of equity and mortgage REITs, meaning they invest in both real estate and real estate loans.

REITs and Taxes

If you receive shareholder dividends from your investment in a REIT, they are treated by the IRS as ordinary income and can increase your tax liability. It is possible for investors to own shares of a REIT within a tax-deferred account, such as a 401(k). If that is the case, the tax liability is deferred until withdrawals are made from the account (typically in retirement). Before investing in a REIT, be sure to speak with your tax professional to discuss the potential tax liability.

What Is a Real Estate Syndication?

A syndication company (like Belrose) allows private investors to actually own a percentage of an individual property. A real estate syndication essentially creates a partnership amongst multiple investors. They pool their capital together to purchase a single investment — such as a self-storage facility. This affords individual investors the opportunity to own a portion of a commercial real estate property they otherwise may not be able to manage alone. 

Whereas a REIT gives investors the opportunity to own a piece of a company that owns multiple properties (or loans), a syndication allows investors to own a piece of the property itself. One significant benefit of a syndication is that investors know what, exactly, they’re investing in. They have the opportunity to learn about the property and conduct their own due diligence. When working with a syndication partner, like Belrose, they know who, exactly, will be overseeing the transaction and operations. With a REIT, investors can review the credibility and past performance of the company but will have no involvement or choice over which properties are purchased.

Another important distinction between REITs and syndications is that the latter is not tied to the stock market. Investors who opt to invest in a syndication can better diversify their portfolios with hard assets that are less prone to volatility.

Real Estate Syndications and Taxes

There are certain tax benefits investors can receive for income earned through a syndication investment. Primarily, those who invest directly in a hard asset like real estate can take advantage of depreciation — how much value is lost over time. The IRS allows owners (including private investors) account for the property’s depreciation in condition when filing their taxes. With a REIT, investors cannot claim depreciation on their investment.

Should You Invest in Real Estate?

Choosing to invest in an alternative investment like self-storage creates a unique opportunity to achieve security, growth, and reliability outside of traditional investment vehicles. If you’d like to learn more about breaking away from Wall Street and pursuing recession-resistant, wealth-building investments, please don’t hesitate to reach out to our team. We’d be more than happy to share some of our recent success stories or pass along additional information about our operations.