Real estate syndication is the high-stakes game of poker, while REITs are like playing a game of blackjack with the dealer – both may have their rewards, but the level of control and potential returns differ drastically.
What is a Real Estate Syndication?
A real estate syndication is a group of investors who collectively pool money together to purchase a single investment property like a multi-family apartment complex, retail space, or warehouse, to name a few.
A real estate syndication is comprised of sponsors who manage the project operations and investors who provide funding for the project.
Sponsors are typically real estate investment companies who put together teams that specialize in identifying real estate opportunities and managing operations to earn above-market returns.
Investors are crucial to the syndicate because they provide most of the project financing. The proliferation of the internet and crowdfunding have made networking between sponsors and investors much easier, bridging the gap between idea and execution.
Syndicates can comprise as few as 2 investors, and the largest syndicates may have hundreds of investors.
The most significant advantage of a real estate syndicate is that it helps investors to purchase a piece of real estate that would not have been possible individually, thus making them an attractive investment opportunity for real estate investors.
What is a REIT?
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating commercial real estate.
REITs often specialize in one real estate sector, like apartment complexes, hotels, shopping malls, timberland, and office buildings, to name a few.
Most REITs are publicly traded and can be easily bought and sold on a stock exchange like the NASDAQ or NYSE. There are also non-traded REITs that operate outside the public market and are, therefore, subject to less regulatory oversight.
Either way, for a company to qualify as a REIT, they are required by law to distribute at least 90% of its taxable income to shareholders in the form of dividends, making them an attractive investment for income-seeking investors.
Key Differences
If you are contemplating investing in REITs or a real estate syndicate, there are 8 key differences between these two investment options.
1. Liquidity
The most significant difference between real estate syndications and REITs is liquidity.
Liquidity is how easily shares or ownership can be bought or sold without impacting the price of an asset.
Because most REITs are publicly traded companies, their securities can be easily bought or sold at a fair market value without significantly impacting the price of the securities.
Meanwhile, because investments in real estate syndications are not publicly traded, they offer almost no liquidity, meaning you cannot easily or quickly sell your investment in a syndicate.
Liquidity could be a significant consideration if you need to sell your investment in less than 3 – 5 years.
2. Minimum Investment
Another key difference between real estate syndications and REITs is the amount of capital required to invest.
You can easily invest in REITs through traditional brokerages like TD Ameritrade in amounts as little as one share.
Meanwhile, most real estate syndications have large investment minimums, often ranging from $25,000 to $100,000, with an average minimum investment of around $50,000.
The amount of money required to invest in a syndicate can be a significant barrier to entry when evaluating REITs vs a real estate syndicate.
3. Ownership Structure
Because real estate syndications are not publicly traded investments, their ownership structure differs vastly from Real Estate Investment Trusts.
When you invest in a syndicate, you have direct ownership in the real estate asset because you become a limited partner (LP) in the limited liability company (LLC), which owns the investment.
Being an owner in a real estate syndication is a significant advantage; it provides access to tax benefits that are only available through direct ownership.
REIT investors do not have direct ownership in the firm’s real estate assets; they have a stake in the company’s stock, which provides no tax benefits.
4. Diversification
Diversification is another salient difference between Real Estate Investment Trusts and real estate syndications.
Syndications typically fund a single acquisition; a retail office building, a warehouse, or an apartment complex, to name a few. This means your investment and the associated risks are concentrated in a single asset.
On the other hand, REITs invest in multiple assets within a specific sector, providing inherent diversification.
Diversification is a key component to building a well-positioned investment portfolio.
5. Barriers To Entry
Real estate syndications have significant barriers to entry compared to REITs.
Income and Net Worth Requirements
Most real estate syndications require investors to qualify as accredited investors, which imposes a minimum income requirement of $200,000 or a net worth of at least $1,000,000, not including your main residence.
High Minimum Investment
Real estate syndicates have minimum investments starting around $25,000, thus creating a significant barrier to entry for real estate investors.
Finding high-quality syndication opportunities can be difficult
Lastly, there is no open marketplace where you can download a list of all investments, like with REITs. Real estate syndication structuring is still largely done by word-of-mouth.
6. Tax Advantages
Investing in a real estate syndicate can offer significant tax advantages not available to REIT investors.
With a syndicate, your investment may distribute taxable passive income. However, as an owner in the asset, your investment may qualify for depreciation benefits which can offset most, if not all, of your distributed cash flow.
Generally speaking, syndicate investors can write off a portion of their income to account for the natural deterioration of the property and its resulting value over time. This lowers the amount of taxes you pay on your ordinary income.
Depreciation Example:
Property Value: $1,000,000
Useful Life: 39 years
Depreciation: $1,000,000/39 = $25,000 approximately
You can deduct $25,000 as depreciation expense for each year for 39 years on a pro-rata basis.
7. Due Diligence
Performing due diligence on a real estate syndication deal and the sponsor of the deal is significantly more time-consuming than REITs.
Since real estate syndicates are not publicly-traded securities, they are exempt from most SEC registration and reporting requirements.
This means there is limited financial data about the potential acquisition that investors can easily access.
Meanwhile, because real estate investment trusts are usually publicly traded, they are subject to stringent reporting requirements. With a few clicks, you can easily find independent research analysis, financial reports, performance history, and details about the REIT’s strategy and management.
8. Investment Options
REITs offer a wide range of easily accessible investment options compared to real estate syndicates.
As of this writing, over 225 publicly-traded REITs trade on major stock exchanges, with a combined market capitalization of $1 trillion.
that invests across all sectors of the real estate industry, from timberland REITs to self storage REITs, all available at investors’ fingertips.
Meanwhile, investing through syndicates can still be a word-of-mouth process; for example, locating a timberland real estate syndicate will be much more difficult.
Which Is Better?
Real estate syndicates and REITs have significant advantages and disadvantages.
As an investor, it’s important to consider your risk tolerance, financial status, investment horizon, investing goals, and how these considerations complement the unique features syndicates and REITs offer.
Real Estate Syndications are good for…
- Investors who are comfortable locking up their money for at least 3 -5 years
- Want tax benefits through direct real estate ownership
- Individuals who have at least $25,000 to invest
REITs are good for…
- Investors who need liquidity; may need to sell their investments in less than 3 years.
- Those who do not have a significant amount of capital to invest
