Why you should invest in a syndication than a REITs.

Private Equity Firms and REIT- Which One is Better?

Investing in housing properties is regarded as one of the oldest types of investment, which made its presence felt right from the time humans started dealing in currencies. Hard to believe, isn’t it? But, a lot of research has been done in this regard and this fact was validated every time. Cut to modern times and real estate investing has literally outperformed every other asset class, beyond any reasonable doubt.

Investing in REITs (Real Estate Investment Trusts) and private equity real estate firms are two of the most popular options of real estate investing prevailing these days. But, any idea which one is the best option for you? You don’t have to worry about that! We will make it easier for you to make this all-important decision!

Which one provides better transparency?

When you invest in a REIT, you do so before the purchase of the properties and you do not always get to know the property you are investing in. REITs have a tendency to generate fees mostly through transactions and deals can be materialized with a sole aim of generating fees. Because of this ‘fee-driven’ mentality, REITs go on to keep their jobs. Also, fees are demanded on the basis of the trades, rather than on the basis of the assets.

On the other hand, a private equity fund chooses a property that has all the ‘ingredients’ for becoming a great investment- location, rent growth, job growth, future cash flow and so on. The mindset is all about investing in real properties. The main drive for the fund manager is to find the ‘correct’ real estate properties that can generate cash flow for longer periods and can create property appreciation for both him and the investors.

Which one involves more expenses up front?

REITs are associated with more upfront expenses as there exists a brokerage system. These expenses are difficult to recoup and they provide no value at all for the investors. On the other hand, you do not need to pay any brokerage when you invest in private equity funds.

Which one provides more tax benefits?

Private equity funds are a clear winner here. When you invest in a REIT, your money goes into a convertible stock. On the other hand, a private equity fund makes you a partner in the property you invest in. As you have the complete backing of real property, the tax implications are favorable to you and here lies the competitive advantage of private equity funds over REITs.

REITs do not pass tax advantages obtained through long-term capital gains and depreciation to investors. Also, payouts received from REIT are taxed at a higher ordinary income rate for the investor. On the contrary, tax benefits from private equity funds are duly passed on to the investors.

The footnote:

From the above discussion, it is crystal clear that Private Equity Firms can offer higher returns over a period of time. It is a better investment proposition and you can have better control over your investment.