by | 17, Apr 2021

REITs vs Syndications Made Simple In Under 10 Minutes

Anthony Vicino: [00:00:14] Hello and welcome to multifamily investing made simple in under 10 minutes, this is the podcast where we take the complexity out of real estate investing and under our ten minutes, I’m getting really crazy with my hands over here. Pacino joined as always by my partner Dan Gruder. See, when I did that, I gave myself the nickname this time

Dan Kreuger: [00:00:34] Another

Anthony Vicino: [00:00:35] Guy and nickname today. Yeah, you’re just you’re just my partner and my partner, Krueger.

Dan Kreuger: [00:00:40] No, I’m here. I like the hand motions for those of you with my hands, for those of you who are viewing this episode as opposed to just listening. It’s like an interpretive dance, really. It’s quite impressive.

Anthony Vicino: [00:00:52] I like to express myself through my fingers. You know, Tony Robbins talks about one of the ways to elevate your energy or change your mood is through physical state changes. So sometimes you just got to get animated to give yourself that extra energy to do whatever the thing is you’re doing. And we’re having a bit of a podcast marathon right now. So I just needed that little bit extra. But we have already blown through roughly two minutes of our ten minute episode, which is going to make the next eight very difficult to get through today’s topic, which is what’s the difference between a rete and a syndication? So what is a Rietz? First of all, let’s let’s answer that question.

Dan Kreuger: [00:01:29] Yes. Rete stands for Real Estate Investment Trust, and it is a publicly traded, typically publicly traded vehicle that’s available to people that are out in the public markets, meaning you could log in to Vanguard’s Ameritrade trade. It should any of these brokerages and type in the ticker symbol for Arete and buy and sell shares, just like you would with Apple or Amazon or Netflix or go to GameStop. So it’s very liquid. You can trade in and out of it. And it seems like on the surface that it is a real estate investment. However.

Anthony Vicino: [00:02:09] It’s not really you’re buying a piece of a business and that business happens to be in real estate, but you don’t get any of the tax benefits of owning real estate. And that’s one of the biggest knocks against Rietz. Let’s put that aside for now and let’s address some of the pros. Let’s build up rates and and give them their due. So you mentioned the liquidity. That’s a great one. If you only have one hundred bucks, you can go on to Robinhood right now and go buy some Rietz. Mike, that’s pretty cool. The returns have generally outsized that of the general stock market over the last 60 years. I think the average is twelve point eight seven percent compared to eleven point six four. So those are pretty good returns. And at the end of the day, you’re investing in like an institutional level investor, somebody who probably knows what they’re doing on the real estate front. So those are some of the the pros of going into it. But now let’s talk about some of the downsides. The first one I already mentioned was the taxes. Let’s unpack that one a bit because it’s pretty big.

Dan Kreuger: [00:03:09] Yeah. If you listen to the recent episode that we did about the five most compelling reasons to invest in real estate, we did a fairly deep dive on the tax benefits of a syndications. If you haven’t listened to that, you definitely should. But in a nutshell, the tax benefits on a multifamily syndication are amazing. The tax liability of investors is going to be quite low to even nothing on those first couple of years where they’re getting distributions. It’s always going to be different for every investor and they should really try out their CPA about specifics. But generally speaking, the flow through nature of those entities allows those depreciation losses to wash out a lot, if not all of the distribution income, which makes them very tax advantageous, not worth a read. You don’t really get that. They believe they are taxed

Anthony Vicino: [00:04:02] Their income

Dan Kreuger: [00:04:02] They hold period based on similar to like a stock. So if you buy and sell something within 12 months, it’s short term capital gains. And if you if you hold it for more than 12 months, it’s long term capital gains. Is that accurate?

Anthony Vicino: [00:04:15] Anything that that is if, you know, it’s taxes, ordinary income. And so instead of helping you like the distributions, so instead of helping you like owning a piece of real estate, it’s actually making your tax burden bigger. So that’s kind of a bummer. Now, that’s not to say that, like, depreciation doesn’t occur with inside of it. It just occurs before it ever hits you and then you get taxed. And so it’s like you don’t get that big benefit of owning real estate, which is a really big hit. So, yeah,

Dan Kreuger: [00:04:44] It’s actually I forgot that on the rates, those distributions are essentially treated as dividends. So if you owned a share of

Anthony Vicino: [00:04:51] Ordinary income

Dan Kreuger: [00:04:52] That sends you a dividend, then that is like the tax rate you’re going to be paying on on a rate. Is that accurate?

Anthony Vicino: [00:04:58] That’s exactly right. Yep. And so no matter how you cut it, it’s not helping your tax situation. And so it’s not a worse deal. It’s not. But as far as

Dan Kreuger: [00:05:08] Real estate goes, it’s pretty bad. You could do better

Anthony Vicino: [00:05:10] If your choice is between. Let’s let’s let’s be fair. Let’s say, like, if the difference is you only have ten thousand dollars to put into it, you probably that’s probably not enough to meet the minimum investment threshold on a syndication, which is usually around 50000. So capital could be a bit of an issue. Access to investing can be a bit of an issue. If you if you want to be able to cash out your investment within the next year, then maybe the Rietz better choice for you then going into a syndication, which is probably going to lock up your money for five to seven years. But let’s talk about the returns now, because, you know, I already mentioned that over the last 40 years, the average return on the rates has been twelve point eight, seven percent.

Dan Kreuger: [00:05:49] Now, does that factor in the value of the shares or is that just the dividends distributed?

Anthony Vicino: [00:05:57] I don’t know exactly how they calculated that,

Dan Kreuger: [00:06:00] Because one of the issues I have with Rietz is the volatility of their share price. They trade. It’s like a just like a stock up and down. So if you bought something and let’s say it paid out dividends make it easy in the first year of 20 percent. But the price of that share dropped. By half over that same time period, I mean, I’m wondering if the return value that you have, there’s obviously

Anthony Vicino: [00:06:25] A consideration to volatility. I don’t know. That’s a good one. I’ll look into that. But the volatility is a good thing to point out here, because these assets, because it’s so easy to get in and out of that liquidity, is the double edged sword because everybody else can get in and out of it quickly as well. And so the valuations can be really negatively influenced based off of that or positively influenced if we’re talking about came up with the same theory. But no matter how you cut it at a 12 percent return, which is solid, let’s not get it twisted. That’s a pretty good return. But it doesn’t really stand up to the returns that are generated in, say, an apartment, syndications. For us to even sniff a deal, it has to hit a 15 percent IRR, which means annualized return is probably going to be a point or two higher than that. So it’s not uncommon in an apartment syndication to see returns north of 20 percent. And at that rate, you’re doubling your money in five years as opposed to at twelve point eight, seven percent. It’s about, what, eight years? Yeah, that’s about an eight year turnaround time for doubling your money. So it’s just like not even comparable.

Dan Kreuger: [00:07:24] Yeah. And these are all pre-tax dollars you’re talking about, too. So once you add in that tax liability, that 12 percent I think is what you said for the rates, probably drops down to more like six or seven. And like we said about the syndications are going to be much better. So the delta between the two becomes even greater once you factor in the task about it.

Anthony Vicino: [00:07:43] Yeah, so those are I think that’s enough bagging on rates. We’re not really bagging on them. It’s just understanding that we have conversations sometimes with investors who say, oh, I’m already heavily invested in real estate, but then when you get down to it, they’re really invested in rits and

Dan Kreuger: [00:07:59] Which is basically the

Anthony Vicino: [00:08:00] Stock market, which is basically the stock market. We don’t we don’t count that as real estate because you’re not getting any of the big benefits of owning real estate. And so you’ve really you’ve taken all the the things that are OK about real estate and you’ve left all the things that make it great off the table, use of leverage, the use of the tax benefits and the better returns. So those are the differences between recent syndications. That’s not to say that rates can’t play a part in your portfolio, but it’s not a big part of mine and it’s not my favorite way of investing. And so

Dan Kreuger: [00:08:30] If you’re going to invest in your estate, invest in real estate, that’s why I say, yeah,

Anthony Vicino: [00:08:34] Get the real stuff. Yeah, not that. Not that. Knock off Louis Vuitton bag. We’ll get the real stuff. All right. So that’s going to do it for us here at multifamily investing made simple in under ten minutes. We’ll catch you guys next week. And.

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