REITS vs Real Estate Syndications

If you're interested in real estate investing, chances are you've heard about the numerous associated benefits. Often, an investor's first instinct is to purchase a rental property to receive a steady stream of cash flow, as well as tax and appreciation benefits. However, any landlord will tell you there's a lot of work that goes into managing a property. From repairs to dealing with problematic tenants, it is definitely an active role which requires some time and energy on the investor's part. When investors decide that active participation in real estate isn't necessarily their cup of tea, investing passively is the next logical solution. Passive forms of real estate investing include REITs and real estate syndications.

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What is an REIT?

REIT stands for real estate investment trust. A REIT is a publicly traded company that invests in income producing properties, usually within a specific asset class – ie. multifamily, office buildings, medical space, etc. When you invest in a REIT, you are buying shares, or a percentage of ownership in that holding company, not the individual properties that they invest in.

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What is a Real Estate Syndication?

A real estate syndication consists of pooling investor money for the purchase of a specific property. Technically, you are still purchasing shares of the holding company, but for that specific property. Also, syndications are not publicly traded.

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Although REITs and real estate syndications both offer passive returns on investments, they have distinct differences that set them apart from one another. Let's look at some of the major differences between REITs and real estate syndications.

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Capital Required to Invest

A major difference between REITs and real estate syndications is the amount of capital required to participate in a given opportunity. REIT shares can be found on the stock exchange for as low as a few dollars a share. Real estate syndications often have a minimum investment amount of $25K or more.

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Access to Opportunities

As mentioned above, REITs can be found on the stock exchange, making them easy to find and invest in. In the majority of instances, real estate syndications fall under Regulation D, which can be accessed in 2 different ways. The first, a 506b offering, does not allow for advertising. The only way for an investor to gain access to this type of real estate syndication would require a pre-existing relationship with the syndication's sponsor. The second, a 506c, allows advertising but require investors to be accredited, which means they are only available to investors who meet specific financial requirements.

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Ownership

Investing in REITs does not offer ownership in any specific properties. Instead, the ownership is in the form of shares in the REIT holding company itself, just like buying shares in any other publicly traded company such as Apple or Microsoft. On the other hand, investing in a real estate syndication gives investors ownership via the ownership entity for a specific property. (Again, the fund model in syndication is somewhat of a hybrid.)

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Liquidity

REITs can be bought and sold at any time making it a liquid asset. Real estate syndications do not offer this same liquidity and have given hold periods written into the business plan, typically 3-5 years. During this hold period, an investors' money is tied up in the property.

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Tax Benefits

Tax benefits are a driving factor for many real estate investors. REITs don't offer the same benefits that real estate syndications do. The money paid to investors from REITs is considered dividend income which leads to a bigger tax bill, whereas real estate syndications allow for taxable income reductions due to the asset's depreciation. That same depreciation is factored in prior to receiving dividends from REIT investments, so REITs do not offer the ability to offset your income at tax time like real estate syndications do.

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Returns

Returns on any given investment will vary for a variety of reasons, including the type of asset, hold time, who invests, and the timing of the investment. That being said, after accounting for cash flow and sale proceeds, real estate syndications have historically provided higher returns than REITs.

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Disclaimer: The information provided in this post is for educational purposes only and should not be considered as advice. Always consult with a qualified professional before making any financial decisions.