Investing in real estate is attractive to many investors because of the potential for growth, income, and tax advantages. Often, investors get started with direct property investments that they can acquire and manage independently. However, some investors want to own more significant properties than they can afford individually or eliminate the need for direct management involvement.
Other options are available for these investors, including real estate funds and REITs. Both of these are passive investments, which means that the investor can receive income from the property, but the assets are managed by someone else. Often, the manager is a sponsor or managing partner. However, investors choosing syndications can more easily target their investments than REIT investors since these companies buy an extensive portfolio into which they may have limited visibility.
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that uses investor capital to buy, improve, and manage real estate. Many REITs are publicly traded on major exchanges like the NYSE, making investing as easy as purchasing stock in any other company. Publicly traded REITs register with the SEC, so investors do not need accreditation to participate, and anyone can own a share for a relatively low price. These investments are liquid because the shares are traded on stock market exchanges. Stockholders also benefit from the requirement that REITs distribute at least 90 percent of their taxable income to shareholders.
In addition to the ease of entry and exit from REITs, one significant advantage to investors is the lack of management responsibility. However, investing in a REIT doesn't allow shareholders to influence asset selection or management decisions. Furthermore, the distributions from a REIT are taxable at the investor’s ordinary income tax rate.
How are real estate funds different?
Real estate funds are often referred to as syndications or private equity funds. A sponsor typically creates these structures to pursue specific real estate investment goals. The sponsor will identify the property and raise capital to fund the acquisition. The syndication might be a limited partnership or an LLC. These investment opportunities typically have a minimum entry requirement and frequently require investors to receive accreditation.
Syndication investors enjoy tax advantages that may be attractive in addition to asset appreciation. Investors can offset income with depreciation, which may help enhance early returns. On the other hand, liquidity is constrained and may have holding periods of ten years or more. Investors may not be able to terminate their investment if they need to do so prematurely.
Which structure offers greater opportunity?
Real estate funds and REITs both have pros and cons for investors. Some differences include the minimum investment, liquidity, and potential tax benefits. Both private syndications and REITs are affected by the overall market conditions. While real estate investment funds may have management fees, REITs also have a comprehensive financial structure that affects investor returns. Keep in mind that REITs are regulated by the Securities and Exchange Commission, which requires that they disclose more financial information to investors than a private equity fund must.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
There are risks associated with these types of investments and include but are not limited to the following:
- Typically, no secondary market exists for the security listed above.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
