There are two main categories of real estate investing - active and passive. In active real estate investing, you yourself are going out on your own and either through buying land and developing a building or purchasing a building that already exists, creating value to take out in the future. With passive real estate investing, you are investing money, just like you would into a stock or bond, and allowing someone else to do the work. With passive real estate investing, you can get the benefits of real estate but you don’t have to do any of the work.

There are ways you can do this on the public market, generally through REITs like LAMR on the Nasdaq or AIV on the NSYE. These investments have pros and cons, just like any investment. One of the biggest cons is that the returns are usually in the single digits and the price of your investment ‘floats’, meaning it can be heavily impacted by market sentiment vs the underlying assets. 

Another way to invest, and what Orion Equity facilitates, is through syndications with private sponsors. In this approach, a sponsor (usually a team of people) do the hard work to find an investment, get it under contract, and then collect money from investors to pool the money together in order to purchase the real estate. The sponsor (rather than the investor) manages the project and ultimately returns the investor’s principal and gains.

With any investment comes risk. Orion does everything in its power to ensure that the projects we underwrite are places we would put money into ourselves (and in fact, we always do). Most projects that cross our desk are filtered out as being either too risky or not presenting a compelling investment thesis and investor return. This is a good thing. In real estate, there’s a common phrase that you need to be “making your money at the beginning”, meaning if you don’t have a financial model that shows  a path to a great return at the outset, don’t purchase the property. This approach ensures the underlying investment isn’t just gambling or speculating on the broader market, but rather the mechanics of the project itself that we can control. We believe this approach gives investors a lot of security when choosing to invest with us.

While I have to preface this by saying this is not legal or accounting advice, and you should always confer with your own CPA before relying on tax advice, I can tell you what I’ve found myself.

There’s a wide spectrum of tax benefits from real estate investing, and it depends how “all in” you are. The further you become a real estate professional, the more benefits there are. Hey, that’s the tax code.

For most people looking to earn passive income, there are three main financial benefits:

1) Depreciation. Real estate can often accelerate depreciation, meaning it pulls forward paper losses. This can offset passive income from other places. So, for example, if you have multiple real estate investments, and one of them has a gain, your “paper depreciation loss” from another can offset it, delaying when taxes are due and giving you more cash today.

2) Long term capital gains. Most real estate deals are held for over a year and thus when sold, don’t cost you as much in taxes as a short term gain would.

3) Leverage. Real estate is one of the best assets to get financial leverage off of debt. Putting say 20% down, even of the value of the building goes up by only 5%, you’ve seen a gain of 25% because only 1/5 of the ownership was placed in the first place. This isn’t a direct tax benefit, but over the course of a project can be. In a cash-out refinance situation, you can pull cash out of the project to return to investors, and there’s no income tax on that because it’s debt. Think of pulling money out of your home in the form of a HELOC - you take out cash, but pay no tax on it.

4) 1031 exchanges. This is difficult to due in a syndication scenario, but with a small group of investors it is very possible. A 1031 exchange allows you to sell real estate for a project, then purcahse another piece of real estate and delay paying taxes on any gain you had from sellin gthat first piece of real estate.

Overall, it’s important to note that real estate defers tax obligations, but rarely erases them. All these tactics kick the taxes down the road for a future date. And either, you keep investing in real estate to keep pushing the taxes forward, or eventually, the tax bill will come due.