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 Syndicate?
A real estate syndicate is a group of investors who collectively pool money to purchase a single investment property like a multi-family apartment complex, retail space, or warehouse.
A real estate syndicate is built on the back of sponsors who manage the project operations, and investors who kick up project funding.
Sponsors are often real estate investment companies who gather teams specializing in identifying opportunities and managing property operations, aiming for above-market returns.
Investors are critical to the syndicate’s operational success because they provide most of the capita;. The proliferation of the internet and real estate crowdfunding make networking between sponsors and investors much easier, ultimately bridging the gap between idea and execution.
Syndicates can be as small as two investors, but the largest options may have hundreds of investors.
A primary advantage to leveraging a real estate syndicate is that it helps investors to purchase a piece of real estate that would not have been possible individually. This piecemeal approach makes real estate syndicates attractive to real estate opportunists no matter their initial capital availability.
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 specific sector like apartment complexes, hotels, shopping malls, timberland, and office buildings.
Most REITs are publicly traded and are 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 subject to less regulatory oversight.
Either way, in order for a company to qualify as a REIT, they’re required by law to distribute at least 90% of its taxable income to shareholders as dividends. This income-driven approach makes them an attractive investment for investors who prefer regular cash flow but finds bonds boring.
If you are contemplating investing in REITs or a real estate syndicate, there are 8 key differences between these two investment options.
The biggest difference between real estate syndications and REITs is their respective liquidity.
Liquidity is how easily shares or ownership are bought and sold without impacting the price of an asset.
Because most REITs are publicly traded, their securities are usually easily bought or sold at a fair market value without impacting the security’s price.
Meanwhile, since investments in real estate syndications aren’t publicly traded, they offer almost no liquidity. For you as an investor, this means you cannot easily or quickly sell your investment in a syndicate.
Liquidity should be a significant consideration if you need to sell your investment in fewer than 3 – 5 years.
2. Minimum Investment
Another key difference between real estate syndications and REITs is the initial capital requirement.
You can easily invest in a REIT through traditional brokerages like TD Ameritrade, buying a stake in the company for as little as one share’s price.
Meanwhile, most real estate syndications have large investment minimums ranging from $25,000 to $100,000. A real estate syndicate’s average minimum investment is typically around $50,000.
The amount of money required to invest in a syndicate may be a significant barrier to entry when evaluating them against REITs.
3. Ownership Structure
Since real estate syndicates aren’t publicly traded, their ownership structure differs greatly from REITs.
When you invest in a syndicate, you have direct ownership in the real estate asset because you become a limited partner (LP) within the limited liability company (LLC) that owns the investment.
Investing as an owner in real estate syndication is a significant advantage because it provides access to tax benefits only available through direct ownership.
REIT investors don’t have direct ownership in the firm’s real estate assets; instead, they have a stake in the company’s stock which provides no tax benefits.
Diversification is another notable difference between REITs and real estate syndication.
Syndicates typically fund a single acquisition like a retail office building, a warehouse, or an apartment complex. This means your investment and the associated risks are embedded and concentrated within a single asset and subject to greater risk.
On the other hand, REITs invest in multiple assets within a specific sector which provides immediate diversification.
Diversification is a key component to building a well-positioned and thoughtful 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 unavailable to REIT investors.
With a syndicate, your investment may distribute taxable passive income. But, as an owner in the asset, your investment may qualify for depreciation benefits that offset most, if not all, of your distributed cash flow.
Generally speaking, syndicate investors write off a portion of income to account for the natural deterioration of the property and its effects on the property value over time. This ultimately lowers the amount of taxes you pay on your ordinary income.
- 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 much more time consuming than researching REITs.
Since real estate syndicates aren’t publicly-traded, they’re exempt from most SEC registration and reporting requirements.
This lack of oversight means there is limited financial data about the syndicate’s acquisitions and history 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 and represent a combined market capitalization of $1 trillion.
Meanwhile, investing through syndicates can still be a word-of-mouth process. For example, if you’re keen on timberland, finding a real estate syndicate in the field is much more difficult.
Which Is Better?
Real estate syndicates and REITs have varied advantages and disadvantages, depending on your needs.
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 both 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