As you continue exploring different avenues for real estate investing, it’s a good idea to understand what the differences between REITs and syndications are and at what stage in your investment career you may benefit from each.
Finding an excellent one can be challenging with so many different opportunities in today’s market. I hope to provide you the information you need to know about REITs and syndications to determine which is best for your portfolio and risk tolerance.
What Are Real Estate Investment Trusts?
Real estate investment trusts are a type of company that sells securities specializing in real estate ventures. Unlike other investments, REITs are structured as trusts, not corporations or partnerships. As such, they have specific tax implications that make them ideal for meeting the needs of both investors and developers. A REIT is an entity designed to own and operate real estate properties on behalf of investors. They can be set up as trusts or corporations. Investors buy shares in a REIT instead of directly investing in properties or real estate projects.
What are the Pros of Investing in Real Estate Investing Trust
This is a classification of the investment which specifies who and how the management can broadly advertise the offering. 506 is an SEC rule which identifies how a security offering can be advertised to the public.
1. Liquidity. Most REITs are listed on equity exchanges, meaning they are highly liquid and easy to trade. This allows investors to efficiently sell their shares anytime, enabling them to access their cash when they want to.
2. Diversification. As a real estate investment trust owns various properties, a single stake in a REIT can provide a good source of diversification. This means that if one of the properties owned by a REIT encounters problems, it is unlikely that it will cause the entire investment to fail.
3. Professional management. REITs are run by professional management teams with experience in real estate. This means that the REIT owners don’t need to worry about the day-to-day management of their properties.
4. Tax benefits. REITs are structured as trusts for tax purposes. This means that investors receive significant tax breaks on their earnings.
5. Reduced risk. Investing in real estate is risky. However, by investing in a single REIT, investors can spread out the risk and reduce the chances of their entire investment failing due to a single project experiencing problems.
Cons of Investing in Real Estate Investment Trust.
1. Limited diversification. REITs typically have a small number of properties. As a result, they don’t provide the same level of diversification as other investment types that have a more significant number of assets.
2. Lack of control. As an investor, you have no authority over the properties owned by a REIT. You can’t decide which properties the REIT should buy or which ones it should sell. You also don’t have any say in how the REIT is managed and can’t influence its strategic direction or critical decisions.
3. High management fees. Many REITs charge high management fees and generate a lot of cash. This means that investors are likely to see their earnings reduced by these fees.
4. Tax disadvantages. While REITs provide significant tax breaks for investors, they also generate a large amount of taxable income. As a result, they are not a good choice for investors in high tax brackets.
What is a Real Estate Syndication?
A real estate syndication is a joint investment structured as either a limited partnership or a corporation. Syndications are typically used to purchase large, income-producing properties that require funding from a group of investors. It is a long-term investment strategy that can last from several months to many years, depending on the project. Investing in syndication is similar to buying a share of stock in a company. The syndication manager acts as the general partner, and the syndication is considered a limited partnership. The limited partners are the investors who purchase a percentage of the syndication.
In many cases, the syndication manager will charge an up-front fee on the partnership’s assets. The various forms of syndication in real estate include limited liability companies, full or limited partnerships, and corporations. Syndicated real estate is the best investment for beginners.
Pros of Investing in Syndications
1. Access to unlisted properties. Syndications are often done with unlisted properties. This means these properties aren’t available on public real estate websites because they aren’t officially for sale. This means they aren’t available to most investors, but syndications allow syndication partners to buy these properties directly.
2. Access to a broader range of property types. Because you aren’t limited to a specific property, you can access a more comprehensive content of property types. You could be a part of residential development, commercial properties, hotels, and vacation properties.
3. Better returns on your investments. Because syndications are often done with high-end properties that have higher rates of return, you have the potential to make more money with these investments.
4. Syndications are mutual partnerships. In syndication, multiple investors come together to purchase real estate. This means that each person is responsible for a share of the property and profits or losses from that investment.
5. Access to Management. Because a syndication is tied to a single asset, the operator is usually accessible by email or even phone.
Cons of Investing in Syndication
1. Risk of over-investing. Real estate is a cyclical industry. This means there are times when things are going well and times when they are not. If you are over-invested in a single type of property, like residential properties, you could have many losses if the market goes downhill.
2. Risk of fraud. Syndications are often done with people you don’t know, usually in other parts of the world. This means there is a higher risk of fraud, and the syndication partners are more challenging to track down if something goes wrong.
3. Longer timelines. Real estate is a long-term investment, and syndications often have very long timelines. This means you won’t get your money back quickly, and you may have to wait years to see your profits.
4. Additional risk of investing in unlisted properties. Unlike listed properties, unlisted properties aren’t verified and could have unknown issues. This means that you could be investing in a property with unknown problems that could result in a loss for you.
REIT vs Syndication
1. Differences in Timing and Risk
One significant difference between syndications and REITs is the time necessary to complete the investment. While syndications can take months or years to complete depending on the type of project, REIT acquisitions generally take place quickly. REITs are typically smaller investments, so they are often easier to close on a shorter timeline than larger syndications.
2. Differences in Investment Size
With syndication, each partner makes an individual decision about how much money to invest in the syndication. With REIT, you invest a predetermined amount of money regardless of the company’s size. The amount that you invest in either syndication or REIT will vary depending on the type of project and the amount of money needed to complete the project. For example, if you invest in a commercial real estate project, you will need an enormous investment than you would if you were to invest in a residential real estate project. The various forms of syndication vary significantly from those of REITs.
REITs vs Real Estate Funds: An Overview
A REIT fund is a trust that invests directly in income-producing real estate. A real estate fund is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies.
REIT, which is not a form of syndication, is a good choice for investors looking for exposure to real estate without the need to buy and operate properties directly. However, they are not the right choice for everyone. To maximize the advantages and reduce the drawbacks of investing in REITs, carefully select the best REITs. Real estate syndication is a scalable investment strategy that lets you partner with multiple investors to fund a single property. There are some critical differences between REITs and syndications that potential investors need to know before deciding which strategy is right for them. On the whole, syndications are riskier than REITs because they involve an equity investment, while REITs are less risky because they are equity-free investments.