Comparing Your Investment Options: Direct vs. Syndication vs. Public REIT

All of these options can create a passive income stream and allow you to share in the potential appreciation of your investment. However, while all three can create a similar outcome — income, appreciation, and diversification — there are some fairly significant differences that I want to discuss.

Publicly-Traded REIT

REIT shares are the easiest way to gain real estate exposure. A few clicks in Robinhood or your e-trade account, and you have exposure to real estate. The biggest advantage to investing in REIT shares is that it is the most liquid. Just as simply as you can buy shares, you can also sell your shares. Additionally, the buy-in is very minimal and likely limited to your brokerage account minimums for partial shares.

REITs are often classified as income stocks and pay out regular dividends to help you create a passive income stream. Additionally, REITs allow you to share in the appreciation of your investment if the stock value increases.

The downside of REITs is the volatility and tax implications. Because I am specifically focusing on publicly-traded REITs, the share price can fluctuate dramatically with consumer sentiment. According to research performed by Black Creek Group, publicly-traded REITs have a 0.65 correlation in quarterly returns to broader public equities and show a 20.2% 20-year annualized standard deviation.

What this boils down to is that publicly-traded REITs show wider returns than even the broader equities market, and much wider than privately held real estate investments. And with a 0.65 correlation, there is a high tendency for publicly-traded REITs to shadow broader equities market trends.

Direct Ownership

The second most common way to gain real estate exposure in your portfolio is through buying an investment property, and for many people, that is a single-family or small multifamily rental.

The biggest advantage to this type of investment is that you have complete control over the investment: what to buy, when to sell, which tenants to lease to, and when to refi. Additionally, no one is splitting your profits. With the proper manager, direct ownership can be a fairly passive investment, with minimal work involved.

The downside to direct ownership typically arises from the illiquid nature of the asset, the lack of diversification, and the work required. While the real estate market has been fairly liquid over the last few years, there are periods of time that even the well-located, well-priced assets sit on the market. Additionally, most real estate deals take over a month from contract to closing, so if an urgent need for capital arises, real estate can be of little help.

Secondly, with single-family and small multifamily properties, your asset diversification and tenant diversification are limited in scope. A single-family rental is either rented or not. Compare this with larger assets or an investment in a portfolio of assets, and the reliance on a single tenant is minimal. Building a portfolio of properties requires large amounts of capital.

And third, direct ownership will always carry work with it. While this may be minimal, it is not nonexistent. If your manager is not performing, you are the one responsible for firing and hiring. Even with a good manager, you will be on call to approve work scopes and handle other items that a manager typically does not handle, such as insurance and tax payments or bookkeeping for non-operating items.

Syndications

The final common form of real estate investment is through syndication. Syndication is the pooling of capital amongst many investors to acquire an asset or assets that would otherwise not be accessible to individual investors. Most syndications offer the benefits of direct ownership, specifically tax benefits, without all the work.

Because of the size of assets typically acquired through a syndication, you can resolve the tenant risk seen in single-family and small multifamily properties. And like public REITs, these are passive investments, so you can simply review financials to monitor investment performance without having to answer tenant or manager calls directly.

There are several disadvantages to syndication, however. First, many syndications require their investors to qualify accredited investors due to SEC rules, and therefore you may not even be able to invest in a syndication.

Second, most syndications require a minimum investment, typically in the $25,000–$50,000 range, that can be substantially higher than buying a share of a REIT, and sometimes higher than the down payment of direct investment.

Lastly, syndications are quite frequently illiquid, and your capital remains tied up until the sponsor decides to sell assets.

Final Thoughts

Depending on your investment criteria, each of these investment alternatives could be a good foot. There are pros and cons to each, and the key is to determine your priorities.

If liquidity is the biggest requirement in your investments, then publicly-traded REITs would likely be the best option. If having a low correlation to the equities market is your driver, either direct investment or syndications can help provide that, and then you’ll simply decide if you want full control or to be passive with your holdings.

About the Author:

Evan is the Investor Relations Consultant for Ashcroft Capital. With over 14 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself. Please feel free to connect with Evan on Linkedin.