Real Estate Syndication vs REIT: Which is Right for You?
New Passive Investor Circle members often think that a REIT is the same as a real estate syndication.
If you want to check out my video breakdown on the two, take a look here:
Both investments offer unique opportunities to invest in real estate, but key differences exist.
In this article, we’ll compare the differences between a REIT and a real estate syndication so you can make the best financial decision.
Join the Passive Investors CircleWhat is a Real Estate Syndication?
Real estate syndication allows investors to pool their resources and collectively invest in specific properties. This investment structure offers you the opportunity to participate in larger real estate deals, which might be out of your reach as an individual investor.
Syndications involve a general partner (GP) who manages the investment and multiple passive investors.
Related article: GP vs LP In Real Estate Syndications: What’s The Difference?
How Do Real Estate Syndications Work?
The process begins when the GP identifies and secures a real estate opportunity. They present the deal to potential passive investors (LPs), providing detailed information about the property, expected returns, and investment terms.
Once enough passive investors commit to the project, legal documents, such as a limited partnership or a limited liability company agreement, are created to establish the investment structure.
Here are the steps involved in real estate syndication:
#1. General partner identifies a suitable property.
#2. General partner recruits passive investors for the project.
#3. Legal documents are drafted to define the investment structure.
#4. Passive investors contribute capital to the deal.
#5. GP manages and operates the property on behalf of the investors.
#6. Passive investors and the general partner share profits based on the agreed structure.
Role of General Partner and Passive Investors
| Role | Responsibilities |
|---|---|
| General Partner | – Identifying and acquiring investment properties – Conducting due diligence and underwriting – Financing and managing the property – Overseeing property operations (leasing, maintenance, etc.) – Managing relationships with passive investors – Distributing profits among investors |
| Passive Investors | – Evaluating investment opportunities – Making the initial investment – Receiving updates on the property’s performance – Receiving profits based on the agreed deal structure |
Real Estate Syndication Deals and Structure
Real estate syndication deals typically involve a specific property, such as an apartment building, office complex, or retail center.
The investment structure can be set up as a limited partnership or a limited liability company (LLC), providing liability protection for passive investors.
Preferred Return
The investment returns are distributed according to a predetermined deal structure. This usually includes a preferred return, a preset percentage of annual profits paid to passive investors before the general partner receives any profits.
After preferred returns are distributed, the remaining profits are typically split between the passive investors and the general partner based on an agreed ratio.
For example, a common real estate syndication structure might offer passive investors an 8% preferred return, followed by a 70/30 profit split between them and the general partner.
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Sign up for my newsletterWhat are Real Estate Investment Trusts (REITs)?
A Real Estate Investment Trust (REIT) is a company that owns, manages, and finances income-producing real estate properties. As an investor, you can purchase shares in a REIT, which allows you to receive a portion of the income generated by the properties without directly owning or managing them.
REITs distribute at least 90% of their taxable income to shareholders as dividends, providing a steady income stream while also allowing for capital appreciation over time.
Types of REITs
There are two main types of REITs: Equity REITs and Mortgage REITs.
Equity REITs
Equity REITs primarily own and manage income-producing properties, such as residential buildings, office spaces, hotels, and shopping centers.
As an investor, your returns come from these properties’ rental income and appreciation.
Mortgage REITs
Mortgage REITs, on the other hand, invest in mortgages or mortgage-backed securities and generate revenue from the interest earned on these loans.
This type of REIT offers more exposure to the financial aspects of real estate rather than the physical properties.
REITs on Major Stock Exchanges
Most publicly-traded REITs are listed on major stock exchanges, such as the New York Stock Exchange (NYSE), NASDAQ, and London Stock Exchange. These REITs must comply with the regulations and reporting requirements of the Securities and Exchange Commission (SEC), providing transparency and security for investors.
Here are some well-known REITs listed on major stock exchanges:
| REIT Name | Stock Exchange | Ticker |
|---|---|---|
| Simon Property Group | NYSE | SPG |
| Prologis | NYSE | PLD |
| Public Storage | NYSE | PSA |
| Welltower | NYSE | WELL |
| Equity Residential | NYSE | EQR |
Public vs. Private REITs
REITs can be classified as either public or private, depending on their structure and accessibility.
Public REITs
These are listed on stock exchanges and can be bought and sold like any other publicly-traded stock.
These REITs offer more liquidity, transparency, and are subject to stricter regulatory oversight.
Private REITs
Private REITs are not traded on public exchanges and are usually available only to accredited investors.
While potentially offering higher returns, private REITs are less liquid, may have higher fees, and may lack transparency compared to their public counterparts.
Minimum Investment Requirements
In real estate syndication, the minimum investment requirement is generally higher, often ranging from $25,000 up to $100,000 or more.
Most of the offerings for our investors have a $50,000 minimum.
This can be limiting for some investors who might not have that much capital readily available.
On the other hand, investing in a publicly traded REIT is more accessible, as the only minimum requirement is to purchase at least one share, which could cost as little as $100 or sometimes even less.
What About Profit Distributions?
Real estate syndications and REITs both offer the potential for positive cash flow and returns on your investment.
REITs
REITs typically pay dividend payouts regularly, providing a consistent stream of income. The average annual return for REITs can vary, but historically, they have performed well compared to other investment options.
Syndications
In the case of real estate syndications, returns are generally generated through rental income and property value appreciation.
These returns can then be distributed to investors, although the frequency and structure may differ from syndication to syndication.
Liquidity and Time Horizon
| Investment Type | Liquidity Description | Time Horizon |
|---|---|---|
| REITs | Traded on public exchanges, making them more liquid. Shares can be bought and sold with relative ease, offering greater flexibility in investment strategy. | Shorter, flexible access to capital. |
| Real Estate Syndications | Involve direct ownership in physical properties, making them less liquid. Investments often require a capital commitment for several years, with less flexibility in withdrawing funds. | Longer, capital locked for several years. |
Tax Implications of Syndication
In real estate syndications, investors have numerous tax advantages.
When you invest directly in a property, you can receive various tax deductions. One of the main benefits is depreciation, which allows investors to write off the value of an asset over time.
Depreciation helps offset the income generated from the property, potentially reducing your taxable income.
Other deductions can include:
- Mortgage interest
- Property taxes
- Operating expenses
REIT Taxation Benefits
The IRS regulates Real Estate Investment Trusts (REITs). These trusts must distribute at least 90% of their taxable income to avoid being taxed at the entity level. This rule provides tax breaks for investors and results in a high dividend yield.
However, it’s important to note that REIT income is categorized as ordinary dividend income, which may lead to a higher tax bill compared to syndications.
Impact on Personal Tax Bill
To understand the impact on your personal tax bill, consider the following comparison:
| Feature | Real Estate Syndication | REIT |
|---|---|---|
| Depreciation Benefits | ✓ | × |
| Variety of Tax Deductions | ✓ | × |
| Tax Breaks | ✓ | ✓ |
| Taxable Income | May be lower | Higher due to ordinary income classification |
| Minimum Investment | Typically higher | Lower |
Frequently Asked Questions
What are the main differences between real estate syndication and REIT investments?
Real estate syndication is a collective investment strategy where multiple investors pool their financial resources to acquire equity positions in real estate ventures, while a REIT (Real Estate Investment Trust) is a company that owns income-producing real estate assets. The investors in a REIT have a stake in the company’s stock.
Key differences include investment minimums, liquidity, and control.
Syndications generally have higher investment minimums, often around $50,000, while you can invest in REITs with just a few dollars.
How does the return on investment compare between real estate syndication and REITs?
The return on investment can vary significantly between real estate syndication and REITs based on factors like market conditions, property types, and management.
Real estate syndications often provide higher returns due to the direct nature of the investment. However, returns are subject to risks associated with specific properties, while the diversified portfolios of REITs help mitigate risks.
What is the typical structure of real estate syndication deals?
Real estate syndication deals are typically structured with a sponsor who handles the management and operations of the investment, and investors who provide the capital.
Investors receive a proportional share of the cash flow, appreciated value, and tax benefits generated from the property.
Can individual investors participate in real estate syndication, and how does it differ from investing in a REIT?
Yes, individual investors can participate in real estate syndication. Compared to investing in a REIT, participating in syndication requires a higher minimum investment, and the investor holds a direct stake in the property rather than just owning shares of the company’s stock.
Syndications offer the potential for higher returns but may have less liquidity than REITs.
What are the tax implications of investing in real estate syndication versus a REIT?
Tax implications for real estate syndication and REIT investments can differ.
In a syndication, investors can benefit from deductions such as depreciation and mortgage interest, which can help offset some of the taxable income.
REITs, on the other hand, are required to distribute at least 90% of their taxable income to shareholders as dividends, which are then taxed as ordinary income.
What level of control do investors have in real estate syndication compared to REIT investments?
In real estate syndication, investors have limited control over property decisions. However, they can often voice their opinions and vote on major decisions.
In a REIT, investors have less direct control over individual property decisions. This is because they own shares of the company’s stock rather than holding a direct stake in the property.
What role do real estate syndications play in diversifying an investment portfolio compared to REITs?
Real estate syndications allow investors to own commercial real estate investments directly, providing a tangible asset that can complement other portfolio components, such as stocks and bonds. They allow investors to gain exposure to specific real estate segments or projects, potentially diversifying their investment portfolio away from the broader real estate market trends typically seen with REITs. While REITs offer diversification through a collection of various properties, syndications provide a more focused investment that can be crucial for achieving specific financial goals, especially for investors looking to balance out their other liquid investments.