Real Estate Syndications Vs. Stocks
Despite it being one of the most powerful investment vehicles on the planet, many people are unaware of what’s involved in investing in multifamily real estate syndications. Meanwhile, the majority of investors are at least familiar with the idea of investing in companies or mutual funds via the stock market. And while we believe the stock market should be part of everyone’s investing strategy, the differences (and benefits!) of multi-family real estate investing are worth understanding. Let’s briefly compare and contrast a few things about these investment vehicles:
Theoretical vs Tangible
One of the most significant differences between real estate syndications and stocks is the nature of what you own.
When you buy stocks, you are purchasing “shares” of a company, which are somewhat abstract. For example, no one piles their family into the good-ol station wagon to go to see the “share” you purchased, right? (I miss station wagons, by the way. Still waiting for the comeback)
Owning that “share” basically means you have purchased the right to a small portion of that company’s earnings. Your share’s resale value is based on the company performance and how the market thinks that company will perform in the future.
Real estate syndications, on the other hand, involve pooling funds with other investors to purchase actual, physical property such as apartment buildings. As an investor in a syndication, you own a fractional interest (called “equity”) in that physical asset— (technically as an LP you own a fractional interest in the owning entity, which is probably going to be an LLC that was created solely to purchase and manage that piece of property). That property, in turn, generates income through rent and appreciates over time. As an owner / equity partner of that LLC, you are entitled to your share of that income and appreciation (and depreciation for your taxes!).
Risk and Volatility
Stocks are known for their volatility, with prices subject to rapid fluctuations based on market sentiment, economic indicators, and global events. This volatility can lead to substantial gains but also significant losses. For investors with a higher risk tolerance, stocks may offer opportunities for quick profits, but they also require a keen understanding of market dynamics and timing.
Real estate syndications, on the other hand, tend to be less volatile. Property values generally appreciate steadily over time, and the income generated from rental properties provides a consistent cash flow. Of course real estate is not entirely immune to economic downturns - there is always risk with any investment - but it is typically considered a more stable investment, especially when investing in well-researched properties in strong markets. If you are looking to sleep well at night, don’t watch the stock ticker at the bottom of the news station. Instead, invest in cash-flowing real estate.
Income and Returns
Real estate syndications typically offer two types of returns: cash flow and appreciation. Investors receive regular income from the rental properties, providing a steady stream of passive income. Cash flowing assets are one of the best defenses you can have against inflation. As the cost of living goes up, so does rent. Additionally, the property’s value typically increases over time, resulting in potential additional gains when the asset is sold.
Stocks can generate returns through dividends and capital appreciation. Dividends are typically paid out by established companies, providing investors with periodic income. And then when the value of a stock increases, this allows investors to sell at a profit. However, not all stocks pay dividends, and relying solely on capital appreciation requires careful timing and market insight.
Understandability and Predictability
One of the biggest advantages of real estate syndications is the relative simplicity and transparency of the investment. When investing in an apartment complex, the success of the investment hinges on a straightforward business model: acquiring, managing, and renting out residential units. That’s something I can understand. This tangible asset is easier to understand and evaluate, even for novice investors. By analyzing factors such as location, market demand, and property management, investors can make informed predictions about the potential success of the investment.
In contrast, stocks often represent ownership in large multinational corporations with complex operations and global market exposure. The performance of a stock can be influenced by various unpredictable factors, such as international trade policies, currency fluctuations, and geopolitical events. These elements can make it challenging for individual investors to fully understand and predict the stock’s future performance.
The simplicity of real estate syndications makes them an attractive option for those who prefer a more transparent and understandable investment. This clarity, combined with the ability to generate passive income, provides investors with a sense of control over their financial future without the complexities associated with the stock market.
Tax Benefits
Real estate investments often come with tax advantages that stocks do not offer. For example, real estate investors can benefit from depreciation deductions, reducing taxable income. Additionally, the 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from a property sale into a similar investment.
Stocks, while offering opportunities for capital gains and dividends, are subject to capital gains taxes. Short-term gains, in particular, are taxed at a higher rate than long-term gains, potentially reducing overall returns. While certain tax-advantaged accounts like IRAs can mitigate tax impacts, real estate’s tax benefits often provide more flexibility and savings.
Diversification
Both real estate syndications and stocks offer diversification opportunities, but they achieve it differently. Stocks allow investors to diversify across various industries and regions, spreading risk across multiple companies and sectors - this is important. This broad diversification can help mitigate risks associated with specific companies or industries.
Real estate syndications diversify within the real estate sector by investing in different property types and locations. This focus on tangible assets provides a powerful hedge against market volatility and offers stability, especially during economic downturns.
Conclusion
Ultimately, the decision between investing in real estate syndications and stocks depends on your investment goals, risk tolerance, and financial situation. Real estate syndications offer tangible asset ownership, stability, and tax advantages, making them attractive for investors seeking passive income and long-term growth. Stocks, on the other hand, offer liquidity and the potential for rapid capital appreciation, appealing to those comfortable with market volatility. A wise investor will likely be investing in both. And by understanding these key differences, you can make informed choices that align with your financial objectives.
- Stephen
