Real estate investment trusts (REITs) and Apartment Syndications are popular options for investors looking to invest in the real estate market. However, they differ in how they are structured, the opportunities, the risk, and the reward. So, what is a Real Estate Investment Trust?
REITs and Apartment Syndications both own property and are methods used to invest in real estate passively. A REIT is a publicly traded entity. You can invest in a wide range of real estate through a REIT: office buildings, shopping centers, apartment complexes, warehouses, and more.
Real Estate Investment Trusts are publicly traded. Therefore they are easier to find and open to all investors. Real Estate Investment Trusts are heavily regulated by the SEC. A REIT must distribute 90% of its taxable income to shareholders via dividends.
Are Real Estate Investment Trusts better than the stock market or apartment syndications?
Based on my 23 years of investing in various real estate assets, REITs’ performance is not as good as most other real estate investing methods. In fact, according to Motley Fool, the average REIT returns less than the S&P 500 in both 5-year and 10-year market cycles ending in 2022.
What is an Apartment Syndication?
Apartment Syndications also have SEC guidelines and, for the most part, have higher returns.
Apartment Syndications typically involve two groups of investors: the General Partners and the Limited Partners. The General Partners, called Lead Syndicators or Deal Sponsors, find and manage the asset.
The other group is Passive Investors, who can be accredited or sophisticated investors. The Limited Partners are indeed Passive Investors, meaning they do not have any duties or responsibilities.
Like Real Estate Investment Trusts, Apartment Syndications also have SEC guidelines. For example, many Syndications fall under SEC Reg D, 506(b). SEC Regulation D, 506(b) is an essential part of the securities law that affects how syndications can raise capital.
The most significant benefit of using Reg D, 506(b) is that it allows the General Partners to raise capital from friends and family members to invest in a syndication, without public advertising. This saves the GP’s money on marketing costs, which can be very expensive when raising capital.
Another advantage of Reg D, 506(b) is that the rules distinguish between “sophisticated” investors and “accredited” investors. Sophisticated investors have sufficient knowledge to evaluate the risks of investing in a company and make their own decisions about whether or not to invest. Accredited investors, on the other hand, are considered financially capable because they meet certain income or net worth requirements. Here is a link to an article about Accredited Investor Requirements.
Reg D, 506(b) also limits how much friends and family can invest in a company. This ensures that companies do not get too heavily reliant on one investor or group of investors, which could put the company at risk if they were to decide to pull out their investment suddenly.
All 27 of the apartment syndication we have invested in have had extensive legal documents ensuring compliance with SEC laws, providing us with peace of mind knowing the rules are regulations are being followed.
In most Apartment Syndications we invest in, the plan is to improve around half the units. By enhancing the units, we achieve rapid income growth, which forces appreciation. Based on our experience in 13 current deals as Passive Investors and 5 “Full Cycle” deals, we far outpace the S&P 500.
On the apartments that have sold and gone “Full Cycle,” our average return has averaged around 20% to 25% per year. It is not uncommon to double our money over three years. Our worst deal had a 16% Internal Rate of Return, IRR. A fancy way of saying 16% per year. However, there have been times, like now, in 2023, when the General Partners decide to “error on the side of caution” and retain significant amounts of cash to build up a rainy day fund, which decreases cash flow. I think this is a great idea, and I do not mind that the cash flow declines.
In conclusion, REITs and Apartment Syndications are both viable options for investors looking to invest in the real estate market. REITs offer a lower level of risk and a steady stream of lower income. In essence, REITS are very easy with lackluster returns, in my humble opinion, based on 23 years of active real estate investing.
Apartment Syndications offer the potential for higher returns. However, most Apartment Syndications have 5, 7, or 10-year business plans for investors who desire more cash flow over more extended periods with a large payout when the property sells.
What are your investment goals? Determining your investment goals based on your short-term and long-term dreams and desires is very beneficial. Then decide whether a REIT or a Syndication is right for you!