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Real Estate Syndication vs. REIT (Passive Income Options)


Adding passive income sources to your investments is a key way to grow your wealth. 

While investing directly in real estate is a great way to diversify your portfolio, passive investments are key to growing your wealth further.

Two commonly compared options are real estate syndication vs. REIT. Understanding the two and their differences is important when deciding how to invest your capital.

Real Estate Syndication Overview

A real estate syndication is a group of investors with one sponsor who invests in a property. The sponsor does all the work, including finding the property and handling all the necessary details, creating an LLC.

Investors interested in investing in the property purchase a percentage of the LLC. This makes investors part owners in the LLC and the property itself. Investors earn a proportionate amount of the profits earned based on their investment.

Pros

  • Passive real estate investment
  • Can work alongside real estate sponsors with extensive experience
  • Opportunities to invest in different asset classes
  • You can invest in real estate syndication in many ways, including cash or retirement accounts.

Cons

  • A long-term investment without the chance of liquidity
  • Strictly a passive investment, which means you can’t make decisions about the property
  • May need to meet strict requirements set forth by the sponsor

REIT Overview

A real estate investment trust (REIT) is a company that invests in multiple real estate properties, but unlike real estate syndications, you don’t own a part of the property. Instead, investors become shareholders of the REIT. 

Most REITs invest in income-producing properties like apartment complexes or commercial real estate.

REIT companies must adhere to much stricter requirements set forth by the Securities and Exchange Commission (SEC), since most REITs are listed on the public stock exchanges.

Pros

  • The opportunity for immediate diversification, since most REITs invest in multiple income-producing real estate investments.
  • Low barrier to entry, making it possible for anyone to invest in real estate
  • It can be a productive source of passive income, with regular dividends.
  • Easily liquidate by selling your shares on the public stock market

Cons

  • There is no control over which properties are purchased or how they are managed.
  • There may be excessive fees to invest in REITs.
  • Dividends earned from REITs are taxable income.

Key Differences Between Real Estate Syndications and REITs

Comparing real estate syndication vs. REIT may seem similar, since they are both investments in properties run by a third party. However, there are many key differences to consider.

Control over investments

When you invest in a real estate syndication, you may have more transparency regarding the property investment. The deal sponsor’s job is to share as much information as possible to entice investors to choose the syndication.

A real estate syndication usually involves a single property, so it’s easier for investors to oversee and understand. You can turn down a deal if the property isn’t something you’d consider.

However, REITs aren’t as transparent, since they invest in multiple properties, not just a single property. Investors may not always know the full story regarding which properties are included in the REIT. The REIT can also buy and sell as they wish without approval from the investors.

Access to invest/barriers to entry

REITs exchange on the public stock exchange, so as you can purchase any stock on the exchange, the same is true of REITs. 

You don’t need to be an accredited investor or have a certain amount of capital. You can invest as long as you have enough capital to purchase a fractional share.

On the flip side, real estate syndications have much stricter rules and aren’t as easy to find because they aren’t listed on a public exchange. In fact, the SEC prevents most syndications from advertising publicly.

Once you find a real estate syndication you’re interested in, you must review the requirements, ensure you meet them, and handle the legalities of purchasing a percentage of an LLC.

Liquidity

Liquidity is always important when comparing real estate syndication vs. REIT opportunities. If you’re investing a large amount of money, it’s important to know how long before you can access it. In the case of real estate syndications, it could be a long time.

When you invest in a real estate syndication, you invest in a property. While it’s not direct, it’s similar to if you bought it yourself. 

Just like a house you purchase yourself, you can’t decide to sell it spontaneously and have cash in hand the next day. The real estate syndication business plan should help you understand how long before you can access your funds.

REITs are much more liquid, since they trade on the public stock market (except private REITs). This allows you to liquidate your investment during the stock market’s regular hours, should you need them.

Tax benefits

One of the largest benefits of real estate investments is the tax deductions they provide, but only real estate syndications see many tax benefits.

When you invest in a REIT, you aren’t investing in real estate per se. Instead, you invest in a company that invests in real estate. 

The REIT itself gets tax deductions, including depreciation, which the REIT considers before distributing dividends. However, you don’t get any of the deductions passed through on your tax returns.

Real estate syndications allow pass-through deductions, such as depreciation, to help lower your income and reduce your tax burden.

Investment minimums

Real estate syndications are much more difficult to invest in than REITs. Depending on your brokerage, you may even be able to invest in a REIT with as little as $1 if they allow fractional shares. There are no requirements to be an accredited investor or to invest a certain amount of money.

Real estate syndications, on the other hand, have much stricter requirements. Most sponsors only allow accredited investors to invest in the LLC. 

In addition, they usually have very high investment requirements that you must tie up for typically five to seven years, making real estate syndications more difficult to obtain.

What syndications and REITs own are different

A real estate syndication is typically for a single property. You know all the property details and can make an investment decision. While the type of property a syndication invests in may be similar to a property a REIT owns, syndications own one property, and REITs own many.

You may not know all the properties a REIT owns—they could include apartment complexes, hotels, retail establishments, or office buildings. REITs buy and sell real estate regularly, too, so ownership changes often.

Syndication and REITs have different structures

You can purchase as many shares of a REIT as you can afford. At the same time, you purchase a percentage of a real estate syndication, aka a portion of the property. You can’t increase your ownership by purchasing more shares of a syndication, but you can with REITs.

What This Means for Passive Income

Investing in a real estate syndication vs. REIT isn’t a decision between active and passive income, since they both offer passive income. However, how you receive the income, how it’s taxed, and how much control you want determines which opportunity is better for you.

Of course, if you aren’t an accredited investor or don’t meet a real estate syndication’s requirements, you won’t have to make a decision; you can only invest in REITs. 

While no one can predict returns, you should have an idea of the returns you’d like for your investment to determine which option is best. 

From Dec. 31, 1978, through March 31, 2016 (the longest time returns have been studied), REITs had an average return of 12.87%, but real estate syndications can have much higher returns, depending on the sponsor’s goals.

Final Thoughts

Understanding the difference between real estate syndication vs. REIT is important, as you decide how to invest in real estate. Both opportunities offer passive income but have much different investment requirements, timelines, tax advantages, and profits.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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