Real Estate Syndication vs REIT – Which Is Best?

real estate syndication vs reit

Whenever someone first joins our Passive Investors Circle, the first step is setting up a call to determine their specific investment goals. Most either don’t have any and if they do, they’re rather vague.

Examples include:

  • I’d like to get into real estate but don’t know where to start.
  • Passive income is something I want but don’t know how to get.

Most of the time, these new members have either found me on this blog or YouTube channel so they have some idea on the topics I teach.

If you’re wanting to get into real estate, the first question you have to ask yourself is, “Why?”

Your own personal “why” is going to be the driving force for you to take action. I can’t tell you how many people that spend hours online learning about real estate yet never invest.

Once you’ve determined your “why”, the next step is to choose between active vs passive investing.

As a periodontist, I don’t have time running a practice and spending time with the family to deal with tenants. So for me, the choice was easy. 

Passive real estate investing was my best option.

If you choose to become a passive investor, you’re going to have to decide on the amount of capital to invest in either:

Real estate syndication vs REIT

Let’s go through each of these investment options to help you decide which is best for you.


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What are REITs?

A  REIT is a real estate investment trust. When you invest, you’re buying stock in a company that owns, operates or finances income-producing real estate. 

REITS are either:

  • Public REITs
  • Private REITs

If they are traded publicly, this means that their shares can be bought and sold on major stock exchanges by anyone with a brokerage account.

On the other hand, privately traded real estate investment trusts means they’re only available to accredited investors who must meet certain income and net worth requirements.

Examples of different properties include:

  • hotels
  • retail centers
  • data centers
  • self storage
  • office buildings
  • shopping malls
  • apartments buildings

Investors can purchase these shares via the stock market through the purchase of individual company stock, mutual fund or exchange traded fund (ETF).

Occasionally people think that investing in an apartment REIT is similar to directly investing in an apartment building or a typical real estate syndication.

Let’s take a look at the key differences.

What is a Syndication?

A real estate syndication is a way multiple group of investors are able to pool funds together to purchase an existing property or build a new one.

They provide investment opportunities to passive investors and contribute to creating passive income. 

Syndications are governed by the Securities and Exchange Commission (SEC) and must file documentation (i.e. private placement memorandum) with and report to them.

Originally these types of investment property were exclusive to the very wealthy but now are much more accessible to the accredited investor.

Who is Involved in Syndications?

There are two groups of partners involved:

1) General Partner (GPs)

 They are also known as the sponsor or real estate syndicators and typically:

  • find and underwrite property
  • perform inspections
  • run the numbers
  • arranging the financing
  • manage the asset

2) Limited Partner (LPs)

This group consists of passive investors with limited risk. They offer their capital  in return for a share of the cash flow and profits from the property.

They are NOT actively involved in managing the property.

They simply sit back and collect distributions (mailbox money) every quarter during the hold period (typically 5-6 years).

REITs vs. Syndications

Ownership Structure

Remember that when investing in a REIT, you purchase shares in the company that owns the real estate assets.  You don’t actively own the property

When you invest in a real estate syndication, you’re able to invest directly in a specific property.

Usually you’ll own a certain percentage through an entity (usually a limited liability company or LLC) that holds the asset. 

Number of Properties

An investment in a REIT portfolio would give you access to several properties across multiple markets in an asset class, which could mean greater diversification for investors.

If one or two properties are underperforming, some of the others within the REIT can help offset the loss.

This is similar to investing in a mutual fund vs a single stock. In a mutual fund, if a handful of stocks decrease in value, there’s typically hundreds of others that can balance out the returns.

On the flip side, with real estate syndications, you invest in a single property in  one market. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment.

 By knowing exactly where your money is going, you can perform your own due diligence on the asset, the market location, the tenants and leases to ensure they are comfortable with every aspect of the transaction.

How You Invest

Similar to public stock, most REITs are listed on major stock exchanges. Because of this, they’re able to be easily found and invested in. You can either invest with them directly or via mutual funds. 

On the other hand, real estate syndications are often under a SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors.

An additional existing hurdle is that many syndications are only open to accredited investors.

Even once you have obtained a connection, become accredited, and found a deal, you should allow for adequate time to:

  • review the investment opportunity
  • sign the legal documents
  • wire in your funds

Typically quarterly distributions begin six months after closing.

Overall, the fees involved with syndications are often way less and increasingly more transparent than investing in a REIT. 

Liquidity

One of the main reasons people invest in REITs vs syndications has to do with liquidity. REITs are more liquid than a real estate syndication and you can buy or sell shares of a REIT at any time.

Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 5 years or more), during which your money is locked in.

Investment Minimums

Real estate syndications typically require higher minimums vs REITs.  The typical syndication investment minimum can vary between $50,000 – $100,000.

When you invest in a REIT, you’re purchasing shares on the public exchange, some of which can be just a few dollars. Thus, the monetary barrier to entry is low which can make it more appealing to new investors.  

Even though you’ll need more capital to invest in syndications, the returns and tax benefits are significantly higher.  

Returns

While returns for any real estate investment can vary wildly, the historical data over the last forty years reflects an average of 12.87% per year total returns for exchange-traded U.S. equity REITs.

reit_graph By comparison, stocks averaged 11.64% per year over that same period.

This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is a great ROI.

Real estate syndications, however, between cash flow and profits from the sale of the asset, can offer around 20% average annual returns.

As an example, a $100,000 syndication deal with a 5-year hold period and a 20% average annual return may make $20,000 per year for 5 years, or $100,000. This takes into account both cash flow and profits from the sale, which means your money doubles (2X equity multiple) over the course of those five years.

Tax Benefits

One of the biggest benefits of investing in REITs versus real estate syndications has to do with taxes. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions.

And one of the most beneficial one has to do with depreciation (i.e., writing off the value of an asset over time). Some times this tax benefit is a big enough reason for investors to invest in real estate in the first place. 

Oftentimes, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer/hospital.

When you invest in a REIT, because you’re investing in the company and not directly in a property, you do get depreciation benefits, but those are factored in prior to dividend payouts.

However, when you invest in REITs, since youre not investing in a property, the tax benefits are not as great. While you still receive the benefits of depreciation, which is taken out before you receive any dividends, you cant use depreciation to offset your other income.  

Unfortunately, dividends are taxed as ordinary income, which can contribute to a bigger, rather than smaller, tax bill. 

Which Should You Invest In – Real Estate Syndication vs REIT?

For  those individuals seeking passive income from a real estate investment, there are two main options:

  • REITs
  • Syndications

While the goal of each option is the same – to earn a return – they both have similarities and fundamental differences between them.

Investors should focus on their characteristics and choose the one that is most suitable for their own needs.

For the high-income professional with a large tax bill, the more legal tax deductions available, the better. 

If you only have $1,000 to invest and want to access that money freely, then investing in REITs may be best.

If you have more capital available and want direct ownership plus greater tax benefits, a real estate syndication may be a better fit.

And remember, it doesn’t have to be one or the other. You might begin with REITs and then add syndications later.

Or you might initially try both to diversify. Either way, investing in real estate, whether directly or indirectly, is forward progress.

Are you ready to build passive income?

Join the Passive Investors Circle today.

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