One of the strengths of investing in real estate lies in just how diverse it is.
From purchasing a property to investing in a real estate syndication or REIT the options are seemingly endless.
We threw out a couple options there, real estate syndication vs REIT. Maybe you’ve come across them before but are fuzzy on the details, or perhaps this is the first time you’ve ever heard about them.
In this article we’re going to compare them as options to invest in real estate, as well as pros and cons of each to help you make the right decision for how you can invest in real estate.
What is a real estate syndication?
A real estate syndication is where a group of individuals or companies pool their money together to purchase a property and benefit from the rental income and potential appreciation that property provides.
Real estate syndications are comprised of two groups:
- The syndicator(s)
- Passive investors
The syndicators are general partners in the deal; they are responsible for finding, structuring, underwriting, performing due diligence, financing, raising capital, completing the purchase, and finally, exiting the deal, among other things. The syndicators spearhead the transaction and perform the critical overhead tasks to make a deal for the property, and ensure the investors receive their pro rata share of available funds.
About those investors: passive investors help by providing the capital needed to purchase the property and in return, they receive equity in the property. Typically, these investments can range from a minimum of $50,000 – $100,000 to several million dollars.
Real estate syndications are structured around a set timeframe for holding the property. These agreements can range from 3 to 10 years, after which the property is sold, benefiting the investors, who share in the profit of the sale in addition to receiving dividends during ownership, when available.
What is a REIT?
A REIT is usually higher level and structured like a mutual fund where you can buy shares in multiple properties. You can purchase shares in an REIT like you would an ETF or mutual fund, making them comparable to investing in the stock market which may be easier or more attractive for newer investors.
Unlike real estate syndication, REITs have no barrier to entry or minimum investment and can be freely traded, making them a liquid way to invest in real estate.
A real estate syndication, though, is different in that the investors own equity in a specific property. With this comes the potential for lucrative returns along with passive income and numerous tax benefits.
What is the difference between a REIT and a real estate syndication?
Already you’re probably getting a decent sense of the differences between a real estate syndication and a REIT. Let’s explore these differences at a deeper level though.
Number of properties involved
Real estate syndication deals typically get you closer to a property (though not too close!) than a REIT would. REITs operate like mutual funds so one share can be an investment in many different properties whereas real estate syndications allow you to get a firmer handle on what you are investing in.
Owning vs investing
In a multifamily syndication, you actually have direct ownership of the property because you are investing in it directly through a group investment.
On the other hand, investing in REIT means you are simply buying shares in a company. This means you do not own the real estate properties purchased by the REIT. When you invest in REITs, you do not own any underlying real estate.
Minimum investment and barrier to entry
Real estate syndications come with a bit of a barrier to entry in that you either need to be an accredited investor or a sophisticated investor to invest in them, and they often come with a minimum investment. REITs on the other hand have a lower barrier to entry and you can purchase as many or as few shares as you’d like.
REITs function more like mutual funds whereas investing in a real estate syndication is typically a longer term investment with a fixed time period. Due to that, REITs are considered more liquid in that you can convert your investment into cash more quickly than by investing in a real estate syndication.
Real estate syndications have numerous tax benefits over REITs. REIT income is considered ordinary dividend income, leading to a larger tax bill. However, real estate syndication’s income and depreciation pass through to the investor’s tax return.
In other words, syndication income can not only give you cash, but they can lower your tax bill by offsetting other income (like W-2 income from a job).
Pros and Cons of a REIT
REITs are not without their pros and cons compared to real estate syndications. Check out the benefits, and the disadvantages of REITs below.
Pros of an REIT
- They are more liquid: Because REITs are traded on an open market, they are more liquid than a real estate syndication in that they can be converted to cash much more quickly.
- Low/No eligibility requirements: REITs can be bought by anyone, for as much or as little as you want to invest making them a great way to get into real estate if you are a new investor.
Cons of an REIT
- Further removed from the property: REITs are about as removed from the properties you invest in as you can get. Properties are bundled together like stocks giving you limited access or insight into what you are investing in.
- No benefit from appreciation: Because you are investing rather than owning, REITs do not benefit from the appreciation or sale of a property like a real estate syndication would.
Pros and Cons of a Real estate syndication
How do real estate syndications stack up against REITs? Check out the benefits, and the disadvantages of investing in a real estate syndication below.
Pros of a real estate syndication
- Passive income: Real estate syndications can offer a stream of passive income due to rental income growth. This can be an excellent way to supplement your income while hedging against risk or having to manage your investment actively.
- No hassle of managing property: Real estate syndications offer the benefits of owning a multifamily property without the hassle dealing with tenants and the property itself.
- Control over what you invest in: Funds like REITs are broad and invest in multiple and sometimes diverse properties, removing you from the decision making. By investing in a real estate syndication you control where your money goes and the type of property you invest in.
- Appreciation: Strong management, property improvements and rent increases result in increased property value. (and real estate has a strong track record) allowing for potential consistent income distributions, and profit when the property is sold.
- Tax Benefits: Because syndications are generally structured as Pass-Through Entities, the investors have potential tax benefits.
Cons of a real estate syndication
- They are illiquid: Compared to a fund like a REIT where shares are traded in a market, real estate syndications are less liquid due to the agreement structure. Typical agreements range from 3-10 years meaning you must be prepared for your investment to stick around.
- Eligibility requirements: Real estate syndications come with eligibility requirements (more on this later) which can bar newer investors from participating.
Real estate syndication or REIT, which is right for you?
Real estate syndications are becoming more popular and attractive as a way to invest in multifamily real estate. As a result, there are plenty of platforms out there that you could pick from to start your investing journey.
If you recall, real estate syndications allow you to decide which property you invest in. As a result, it’s critical that you invest with a highly experienced group with a strong track record for success and who invests alongside you.
At Colony Hills Capital we are experts in the acquisition, ownership, and management of property in growing markets around the country. While we cannot guarantee results, we always aim to provide consistent and above average passive income to our investors. Past performance is no guarantee of future results. Interested in investing? Contact us today to learn more.