REITs and syndications both present distinct opportunities to tap into the profitable real estate sector. While many investors lean towards publicly traded REITs for their liquidity and straightforwardness, they also have their set of constraints.
This article will help you understanding the differences between REITs and Syndications, provides our list of Pro’s and Cons, and summarized why we view Syndications as a persuasive option compared to REITs, particularly for investors who value direct ownership, more influence, and the possibility of higher returns The Main Differences Between REITs and Syndications
Structure: REITs: Corporation or trust that owns or finances income-producing real estate; can be publicly traded or non-traded. Syndications: Partnership where individual investors pool their money for a specific real estate project; led by a general partner or sponsor. Liquidity: REITs: Publicly traded REITs are highly liquid. Non-traded REITs are less so. Syndications: Typically illiquid with investments tied up for several years. Accessibility: REITs: Available to all investors, like buying shares of a stock. Syndications: Many are restricted to accredited investors. Investment Minimum: REITs: Generally low; buy as few or as many shares as desired. Syndications: Typically higher, often starting from $50,000 or more. Dividends & Returns: REITs: Must distribute at least 90% of taxable income as dividends to shareholders. Syndications: Offer a preferred return with additional profits shared among investors and sponsors. Transparency: REITs: Publicly traded ones are required to disclose financials and are regulated. Syndications: Varies by syndicator; no universal mandate for disclosure. Control & Strategy: REITs: Individual investors have no direct control over properties; strategy set by REIT management. Syndications: Though mostly passive for limited partners, investors might have a closer relationship with the management team and clearer visibility into specific properties. Risk Profile: REITs: Exposed to stock market volatility (for publicly traded REITs); diversified portfolios can spread risk. Syndications: Risk is tied to specific properties and the capability of the sponsor.
The PRO's and the CON's of REITs and Syndications
Pros: Highly liquid (if publicly traded), accessible to non-accredited investors, diversified portfolios, professional management.
Cons: Less control over specific investments, potential lower returns than direct ownership or syndications, market volatility.
Pros: Potential for higher returns, direct investment in specific properties, closer relationship with management team, tax benefits.
Cons: Less liquidity, higher minimum investments, dependent on the success of the management team, potential for total loss
The Benefits of Investing in Syndications
Direct Ownership & Control: As a syndication investor, you typically hold a direct stake in a specific property or project, unlike REITs, where you're essentially buying shares in a company that owns a portfolio of properties. This gives you more control over your investments. Access to Premium Deals: Syndications often provide access to institutional-grade opportunities that are typically unavailable to individual investors. The syndication sponsors do the heavy lifting of identifying, acquiring, and managing these premium deals. Tax Advantages: Perhaps one of the most compelling advantages of syndications over REITs is their tax benefits. Syndications allow for benefits such as depreciation and interest deductions, which can significantly reduce taxable income. Alignment of Interests: In a syndication, the sponsor's compensation is usually tied to the performance of the property, creating an inherent alignment of interests. This means the sponsor is incentivized to ensure the property performs well, which is not always the case with REIT managers. Potentially Higher Returns: While every investment carries risk, the returns on syndications can often outperform those of REITs due to the specific nature of each deal, the direct ownership structure, and the ability to add value to the properties.
Syndications can be a robust addition to your investment portfolio if you're looking for tangible assets, tax advantages, and potentially higher returns. While REITs provide a more liquid and broadly accessible way to invest in real estate, syndications often offer a closer connection to specific projects and the potential for higher returns.