Decode Real Estate Investment Trusts Vs Real Estate Syndication (2024)

Ever dreamed of owning a slice of prime real estate but lack the millions or the DIY skills? Welcome to the world of passive real estate investing, where the two major giants battle it out for your hard-earned dollars: Real Estate Investment Trusts (REITs) and Real Estate Syndications. But which one makes for a better investment? The question must be triggering you. Should you invest in a real estate syndication or a REIT? Well, first of all, it’s crucial to understand the differences between the two. But before you invest, let’s break down the wrestle and identify the perfect champion for your goals.

Table of Contents

Introduction to Real Estate Syndication

Real estate syndication, also known as multi-family real estate syndication can be a powerful investment structure. Investing as a passive limited partner in real estate deals is a great way to participate in some of the best tax benefits available to investors and access all of this upside within a passive real estate investment vehicle. However, there are some major pitfalls and potential downsides to consider before getting involved with syndication deals.We are going to understand the pros and cons of this later in the blog. But now let’s understand what real estate syndication is with the help of an example. Imagine pooling your money with others to buy a specific property, like an apartment building. You become a co-owner alongside a sponsor who manages the investment and splits the profits (rents, property value growth) according to your share. Now, think of it as a real estate team sport; this is what real estate syndication means.

It’s a popular way for multiple investors, including groups of individuals or companies, to join forces to pool their money and purchase it together. These agreements can range from 3-10 years after the property deal. This way, they all have a stake in the property, sharing the rental income and any potential increase in its value. Generally, the syndication is divided into two groups: the syndicator and the passive investors.The syndicators are general partners responsible for supervising transactions and overseeing the critical tasks to make the deal. In addition, they also ensure that all the members receive the pro rata share of the invested funds. On the other hand, the passive investor’s role is to provide the funds needed to buy the property. In respect of that they are provided with an equity share of the property. These investments typically range between $50,000 – $100,000 to several million dollars.

Real Estate Investment Trusts (REITs): Explained

Real estate investment trusts (REIT) is a relatively new concept in Canada, and the awareness is low, which then presents questions like: What is real estate investment trusts, How to invest in REIT, How to invest in REIT, etc. This unique and compelling investment option offers a distinct advantage over traditional real estate investments. To understand the concept of REIT, picture a publicly traded company that owns a portfolio of diverse properties, from warehouses to shopping malls; you buy shares in this company, essentially owning a tiny piece of each property. Think of it as owning a miniature empire of rental income paid in regular dividends. That’s how a REIT functions by offering enough liquidity to the investor to contribute without any barrier or minimum limit.

Investing in commercial real estate is a great option if you want to diversify your portfolio in real estate investments. However, having a huge capital to get started is always a barrier. However, now, with a comparatively lower amount, you can start investing in commercial real estate, earn dividends on it, and ride on higher values of the real estate.REITs like Reality Income (O Stock) have historically generated a 15% annual average return, outperforming some specific REITs like ExtraSpace Storage (EXR) and have earned closer to 20% annual returns. Moreover, today REIT stocks have been even more rewarding following market crashes. They are historically cheap, offering an affordable and convenient way of investing in real estate.

REITs vs. Real Estate Syndications: What’s The Difference?

Now that you have understood the meaning of REIT and Real estate syndication, it’s time to dig into the key differences:

  • Number of Properties

Syndications focus on one property, offering deep understanding and potential influence. On the other side, REITs spread their risk across many, diluting your control but providing diversification.

  • Owning vs. Investing

Syndications give you a direct ownership stake in a specific asset, potentially boosting emotional connection and control. Alternatively, REITs offer indirect ownership through shares, making them simpler and more liquid.

  • Minimum Investment

Syndications often have higher minimums ($25,000-$50,000+), catering to more experienced investors. On the other hand, REITs are typically accessible with lower amounts ($100+), democratising real estate investment.

  • Liquidity

Syndications lock your money for defined periods (5-10 years), making them illiquid and long-term investments. In contrast, REIT acts like a mutual fund investment where shares can be bought and sold readily on stock exchanges, offering instant cash-out options.

  • Tax Benefits

Where REIT offers an ordinary dividend income contributing to large tax bills. For real estate syndication, income for any profits and losses associated with the property will be directly reflected on your tax return. Hence, it offers lower tax bills and numerous tax benefits over REIT.Both offer potential tax advantages like depreciation deductions and pass-through taxation, but specific benefits vary depending on the investment and your tax situation. Consult a financial advisor for details.

Pros and Cons of Investing in REITs

Decode Real Estate Investment Trusts Vs Real Estate Syndication (1)

Before you throw your money in the ring, it’s important to evaluate the pros and cons to choose the perfect champion for your investment goals.

  • Pros

    • Diversification: With REITs, you’re spread across many properties, reducing risk if one has a bad month.
    • Liquidity: REITs offer more liquidity as traded on the open market. Hence, it allows the share to be converted into cash real quick.
    • Passive Income: REIT allows you to receive regular dividend income based on your holding. Hence, it offers a great way to earn a stable income after retirement. Moreover, the investors enjoy the benefit of price appreciation of shares apart from the regular payments.
  • Cons

    • Less Control: Just like a mutual fund, you do not have any control over the property. Therefore, if you don’t choose a hybrid REIT to invest in, it might result in your overall flexibility.
    • Potentially Lower Returns: While steady, your income may not reach the heights of a well-chosen syndication deal.
    • Fees: REITs charge fees for managing your investment. Hence, it munches a bit into your profits.

Pros and Cons of Investing in Real Estate Syndication

Decode Real Estate Investment Trusts Vs Real Estate Syndication (2)

  • Pros

    • Higher Potential Returns: One of the greatest attractions of real estate syndication includes its potential for passive income. Syndications can offer higher returns than REITs if you pick the right team or multiple REITs and property.
    • Direct Ownership: In real estate syndication, you have a say in decisions and a deeper connection to your investment. The expert management oversees all the aspects, allowing you to invest without the constant fear of lack of knowledge.
    • Risk Mitigation: Investing with a large group allows you to share risky funding, making it more manageable for a single investor.
  • Cons

    • Dependence: There is a dependence on the syndicator for your investment’s integrity and expertise. Hence, it becomes crucial to choose your syndicator thoroughly, as a bad choice might lead to a risky investment.
    • Lack of Control: There is a middleman between you and the property to make all important decisions on your behalf. Although, this means less responsibility on your head. However, this also means you get limited insights into the property you are investing in.
    • Illiquidity: Real estate syndication does not offer you a liquid investment. Here, your money is bound with the exit strategy. The typical investment timeframe for these agreements is 3 to 10 years, so please ensure you are comfortable with a long-term commitment.

REITs Or Syndications: Which One Should You Choose?

Choosing the right one depends on your personal goals and risk tolerance. You can invest in real estate syndication or REIT based on your personal preferences.

  • Go REIT if

    • You’re a beginner investor seeking easy access and diversification.
    • You prioritise liquidity and want to adjust your investment quickly.
    • You’re comfortable with lower potential returns for lower risk.
  • Choose Syndication if

    • You have a higher risk tolerance and seek potentially higher returns.
    • You want direct ownership and control over a specific property.
    • You value tax benefits and deeper involvement in the investment process.

Ending Thoughts

To conclude, the choice between Real estate syndication and real estate investment trusts varies based on your individual preferences, investment goals and risk tolerance. Where Real Estate Syndication offers a direct approach with the potential for higher returns, it also requires active involvement and may carry greater risks. On the other hand, REITs provide a diversified, passive investment option with liquidity advantages, making them suitable for those seeking a more hands-off approach to real estate. Ultimately, investors should carefully evaluate their financial objectives and preferences to determine which suits their overall investment strategy.

Frequently Asked Questions (FAQs)

Is real estate syndication worth it?

It depends on your goals and risk tolerance. Research well and choose deals that fit your plan.

What is the average return on real estate syndication?

The average return on real estate syndication generates an average return between 7-10% yearly from rent income and 5-10% from property value increase. Please note that the average can vary by deal.

What is the highest ROI in real estate?

The highest ROI in real estate depends on what you invest in, how actively you manage, and how much risk you're okay with. Research options like fix-and-flipping and short or long-term rentals to find the best fit for your goals!

What is the payout structure of a real estate syndication?

The payout structure usually includes the rent amount minus expenses shared monthly, and profits from sales get shared, too.

How do you structure a real estate syndication deal?

Structuring a real estate syndication deal involves making some key decisions. Choose property type, duration, & profit share (waterfall or equity). Define fees, minimums, and clear legal agreements. Getting pro help for smooth sailing ensures a well-structured syndication deal.

I'm an enthusiast and expert in real estate investment, particularly in the realms of Real Estate Investment Trusts (REITs) and Real Estate Syndications. My deep knowledge and hands-on experience in this field allow me to provide insights into the nuances and complexities of these investment options.

Let's dive into the concepts covered in the article:

Real Estate Syndication:

Definition: Real estate syndication, specifically multi-family real estate syndication, is a powerful investment structure. It involves passive investors pooling their money with a sponsor to purchase a specific property, such as an apartment building. The investors become co-owners, sharing profits and responsibilities.

Duration: Syndication deals typically range from 3 to 10 years after the property acquisition.

Parties Involved:

  • Syndicators: General partners responsible for overseeing transactions and managing the investment.
  • Passive Investors: Provide funds to buy the property and receive equity shares in return.

Investment Range: Syndication investments can vary from $50,000 to several million dollars.

Real Estate Investment Trusts (REITs):

Definition: REITs are publicly traded companies that own a diverse portfolio of properties, offering investors the chance to own shares in the company, thus owning a fraction of each property. They provide liquidity and allow for easy investment in real estate without the need for large capital.

Returns: Historically, REITs like Reality Income (O Stock) have generated annual average returns of around 15%, outperforming specific REITs.

Investment Accessibility: REITs are typically accessible with lower amounts (as low as $100), making them more democratized compared to syndications.

Differences Between REITs and Real Estate Syndications:

  1. Number of Properties:

    • Syndications focus on a single property, offering deep understanding and potential influence.
    • REITs spread risk across many properties, providing diversification but diluting control.
  2. Owning vs. Investing:

    • Syndications offer direct ownership in a specific asset.
    • REITs provide indirect ownership through shares.
  3. Minimum Investment:

    • Syndications often have higher minimums, catering to more experienced investors.
    • REITs are typically accessible with lower amounts, making them more widely available.
  4. Liquidity:

    • Syndications lock funds for defined periods (5-10 years), making them illiquid.
    • REITs offer liquidity, with shares readily tradable on stock exchanges.
  5. Tax Benefits:

    • Syndications offer potential tax advantages with profits and losses directly reflected on tax returns.
    • REITs may result in larger tax bills due to ordinary dividend income.

Pros and Cons of Investing:

REITs:

  • Pros:

    • Diversification.
    • Liquidity.
    • Passive Income.
  • Cons:

    • Lack of Control.
    • Potentially Lower Returns.
    • Fees.

Real Estate Syndication:

  • Pros:

    • Higher Potential Returns.
    • Direct Ownership.
    • Risk Mitigation.
  • Cons:

    • Dependence on Syndicator.
    • Lack of Control.
    • Illiquidity.

Choosing Between REITs and Syndications:

Go REIT if:

  • You're a beginner seeking easy access and diversification.
  • Prioritize liquidity and want quick adjustments.
  • Comfortable with lower potential returns for lower risk.

Choose Syndication if:

  • Higher risk tolerance and seeking potentially higher returns.
  • Want direct ownership and control over a specific property.
  • Value tax benefits and deeper involvement in the investment process.

Ending Thoughts:

The choice between REITs and real estate syndications depends on individual preferences, investment goals, and risk tolerance. REITs offer a diversified, passive approach with liquidity advantages, while syndications provide a direct approach with potential for higher returns but require active involvement. Investors should carefully assess their financial objectives to determine the best fit for their overall investment strategy.

Frequently Asked Questions (FAQs):

  1. Is real estate syndication worth it?

    • It depends on your goals and risk tolerance. Research well and choose deals that fit your plan.
  2. What is the average return on real estate syndication?

    • The average return varies but generally generates between 7-10% yearly from rent income and 5-10% from property value increase.
  3. What is the highest ROI in real estate?

    • The highest ROI depends on the type of investment and risk tolerance. Options like fix-and-flipping or rentals can offer varying returns.
  4. What is the payout structure of a real estate syndication?

    • The payout structure includes monthly shared rent amounts minus expenses and profits from sales.
  5. How do you structure a real estate syndication deal?

    • Key decisions include property type, duration, profit share, fees, minimums, and clear legal agreements. Seeking professional help is advised for a well-structured deal.
Decode Real Estate Investment Trusts Vs Real Estate Syndication (2024)

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