If you’re looking for a way to invest in real estate, you may have come across the terms “real estate syndication” and “REIT.” But what’s the difference between the two? Keep reading as we discuss the differences between real estate syndication and REITs and help you decide which option is right for you.
What is Real Estate Syndication?
Real estate syndication is a way for small investors to pool their money together and invest in real estate. In real estate syndicate investing, one person, the sponsor, takes the lead and finds an investment property. The other investors (limited partners) then provide the capital needed to buy the property.
Usually, the deal sponsor handle property management. The limited partners typically remain hands-off. This setup allows smaller investors to participate in a real estate deal that they may not have had the capital to get into on their own.
What is a REIT?
A real estate investment trust or REIT owns and operates income-producing real estate. REITs must distribute at least 90% of their taxable income to shareholders, making them a popular choice for income-seeking investors.
REITs can be publicly traded or private, and they come in all shapes and sizes. Some own large portfolios of commercial properties, while others focus on residential rentals or mortgage loans.
The key difference between a REIT and real estate syndication is that a REIT is a company that owns and operates real estate, while real estate syndication is an investment vehicle used by small investors to pool money together and invest in property.
So which investment opportunity should you choose? That depends on your investing goals and experience level. If you’re looking for passive income from a real estate investment, you should consider a REIT. On the other hand, if you have more experience investing in real estate and want to actively participate in deals, an individual property syndication may be the better option.
Pros and Cons
Both real estate syndication and REITs have their pros and cons. Let’s break them down further.
Pros of Real Estate Syndication
– Lower minimum investment – Individual real estate syndication deals have lower minimum investments than some REITs, allowing smaller investors to participate in the syndication deal, which is not always possible with a REIT.
– More control – If you invest directly in real estate properties, you’ll get much more visibility into what’s happening at the property level. You can also choose to be very involved in day-to-day property management if that’s something you want. On the other hand, an investor in a publicly-traded REIT has no control over how their money is invested or managed by company management daily.
Cons of Real Estate Syndication
Despite these benefits, there are several potential risks to consider before investing in a real estate syndication:
– Limited partners have no control – As mentioned, a limited partner in a real estate syndication has very little control over the property, which can be risky if you’re not comfortable handing all power over to the deal sponsor.
– No liquidity – If you need to sell your investment in a hurry, it may be difficult to find a buyer interested in an illiquid asset like real estate.
Pros of REITs
– Liquidity – Unlike an individual real estate syndication, shares of a REIT are highly liquid and can be sold on public exchanges pretty easily. This makes them a good option for potential investors who want more flexibility with their money.
– Diversification – REITs offer private investors broad exposure to the real estate market, which can be a good thing if you’re not comfortable picking individual properties.
– Professional management – REITs typically have professional management teams in place who are responsible for managing and growing the company’s portfolio of assets. This can be reassuring for some investors.
Cons of REITs
– Management fees – One downside of investing in a REIT is that you’ll likely pay higher management fees than if you invest directly in real estate.
– No control over operations – As with a real estate syndication deal, investors in a REIT have no control over how their money is invested or managed on a day-to-day basis.
– Lower returns – Over the long term, investing in real estate directly can generate higher returns than a REIT. However, a REIT may provide a more predictable cash flow and less volatility.
Deciding Which Option is Best for You
When deciding whether or not to invest in a real estate syndication or REIT, there are two things you should look at: your goals as an investor and your experience level with real estate investing. If you’re new to real estate investment, don’t have much capital available, and want exposure to multiple properties without taking on too much risk, investing in a publicly-traded REIT makes sense if it fits within your overall portfolio allocations.
However, if you’re more experienced with real estate investing, have a higher risk tolerance, and want to actively participate in deals, an individual property syndication may be the better option. Just make sure you do your due diligence on the sponsor and understand all the risks involved before making any decisions.
Investing in Real Estate
No matter how you choose to invest in real estate, there is one type of real estate capturing investors’ attention rapidly: multifamily real estate. Multifamily real estate is simply housing designed to accommodate more than one family and includes apartments, townhouses, and even condos.
The reason multifamily real estate is so popular right now is because it offers investors several attractive benefits:
– High demand – Multifamily properties are in high demand due to the increasing population density in many cities across the country. This means that there is always strong rental demand for these properties, which helps to keep vacancy rates low and rents high.
– Low maintenance costs – Unlike single-family homes, multifamily buildings have economies of scale, which help to keep maintenance and repair costs down.
– Diversification – Investing in multifamily real estate provides investors with exposure to multiple property types, markets, and geographies. This can help to reduce overall risk while providing the potential for higher returns.
