Introduction:
One of the exciting aspects of a commercial real estate investment is that there are many vehicles through which an individual can gain exposure to this asset class. Two such options are a Real Estate Investment Trust (REIT) and an individually syndicated deal. While both of these options are in pursuit of the same objective (a high return), the structure and method used to achieve it are very different.
In this article, the key differences between REITs and syndications are discussed. By the end, we hope you will be able to identify which option is a more suitable fit for your investment objectives.
At Financial Peace Investing, we offer individually syndicated investment opportunities from our partnering operators in promising markets with high job and population growth. To learn more about them, schedule a call with us.
Real Estate Investment Trust (REIT):
- Definition: REITs are entities engaged in buying, selling, operating, or financing commercial real estate, often specializing in specific property types.
- Structure: REITs can be privately traded, accessible only to accredited investors, or publicly traded on major stock exchanges. The portfolio may encompass various asset classes, offering investors fractional ownership in a diversified real estate portfolio.
Real Estate Syndication:
- Definition: Syndication refers to a temporary alliance of individuals collectively investing in a large transaction, facilitating the acquisition of expensive commercial real estate assets.
- Structure: Syndications are typically organized as Limited Liability Companies (LLCs) or Limited Partnerships (LPs), involving a General Partner (GP) responsible for managing the deal and Limited Partners (LPs) acting as passive investors. This structure allows for direct ownership of a single property, providing transparency and control.
9 In-Depth Comparisons Between REITs and Real Estate Syndications:
1. Number of Assets:
- REITs: Distinguished by a vast portfolio spanning multiple markets and asset classes, enabling investors to benefit from built-in diversification.
- Syndications: In contrast, real estate syndications focus on singular properties within specific markets. While this may imply less immediate diversification, investors gain granular insights into the property’s location, financials, and unique business plans.
2. Ownership:
- REITs: Investors in REITs essentially own shares in the company that possesses real estate assets. However, this form of ownership lacks a direct connection to a specific property.
- Syndications: In syndications, investors contribute directly to the purchase of a specific property through an entity (usually an LLC), offering a tangible and transparent form of ownership.
3. Access to Invest:
- REITs: Publicly traded REITs are readily accessible through major stock exchanges, mutual funds, and exchange-traded funds (ETFs). This accessibility allows investors to swiftly engage in transactions online.
- Syndications: The path to real estate syndications is often influenced by SEC regulations, limiting public advertising for certain funds (e.g., 506b). Discovering syndication opportunities may require an existing connection or knowledge of the sponsor, and they are frequently exclusive to accredited investors, which enforces a minimum income criterion of $200,000 or a net worth of at least $1,000,000, excluding your primary residence.
4. Investment Minimums:
- REITs: REITs offer a low entry barrier, enabling investors to purchase shares at a nominal cost, sometimes just a few dollars.
- Syndications: Syndications generally necessitate higher minimum investments, ranging from $25,000 to $100,000 or more. This higher financial commitment serves as a potential barrier to entry for some investors.
5. Liquidity:
- REITs: The liquidity of REITs is a key advantage, allowing investors to buy or sell shares at their discretion. This instant liquidity is particularly beneficial for those who may need quick access to their capital. However, liquidity in REITs is not universally uniform. Some REITs may impose restrictions and fees on liquidation, impacting the ease and cost-effectiveness of selling shares.
- Syndications: Syndications follow a specific business plan that often involves holding the asset for a defined period, typically three to five years or even more. This results in limited liquidity during the investment period.
6. Tax Benefits:
- REITs: Under IRS rules, REITs must pay out at least 90% of their taxable income to avoid being taxed at the entity level, which results in a high dividend yield. While REITs provide depreciation benefits, these are factored into dividend payouts. Dividends, however, are taxed as ordinary income, potentially contributing to a higher tax bill for investors.
- Syndications: Syndications offer robust tax benefits, including deductions for operating expenses and depreciation. The depreciation benefits may even surpass the cash flow, providing a potential tax shield for investors.
7. Returns:
- REITs: Historical data indicates an average annual return of 11.9% for exchange-traded U.S. equity REITs throughout 1972-2021[1]. However, these returns can be subject to stock market volatility and broader economic factors.
- Syndications: The performance is primarily linked to the specific property chosen by the management team for investment. The ROI is also contingent on the management team’s capacity to secure a favorable asset price and effectively manage it over time. Investors who choose syndications often have confidence in the management team’s ability to yield robust returns. Syndications provide potentially higher returns than REITs, averaging around 20% annually. This encompasses both cash flow and profits from the sale of the asset, reflecting the direct impact of property performance.
8. Due Diligence:
- REITs: Publicly traded REITs undergo stringent reporting requirements, providing investors with access to independent research, financial reports, performance history, and details about the REIT’s strategy and management.
- Syndications: Due diligence for real estate syndications is often more time-consuming, given the exemption from most SEC registration and reporting requirements. Investors rely heavily on personal connections, sponsor credibility, and the information available through the syndication’s documents.
9. Investment Options:
- REITs: With over 225 publicly traded REITs on major stock exchanges and a combined market capitalization of $1 trillion, investors have a plethora of easily accessible options. REITs cover various real estate sectors, from Mortgage REITs to timberland REITs.
- Syndications: Investing through syndicates may still be a word-of-mouth process, making it challenging to find specific options, especially in niche sectors. The accessibility and variety of syndication opportunities may not match the convenience of REITs.
Conclusion: The choice between REITs and syndications is highly dependent on individual preferences, financial capacity, tax planning, and investment goals. While REITs offer accessibility and historical performance, syndications provide direct ownership and potential tax advantages.
Real Estate Syndications are suitable for…
- Investors who are okay with committing their funds for a minimum of 3-5 years.
- Those seeking tax advantages from direct ownership of real estate.
- Individuals with a minimum investment capacity of at least $25,000.
REITs are ideal for…
- Investors in need of liquidity, possibly requiring the option to sell their investments within less than 3 years.
- Those lacking a substantial amount of capital for investment.
Reference:
1. https://www.fool.com/research/reits-vs-stocks/
2.https://www.reit.com/news/blog/market-commentary/reit-average–historical-returns-vs-us-stocks