Real Estate Syndication or REIT?
A REIT is a Real Estate investment trust, who own/finance income producing properties.
Investors like REITs because it allows them the ability to include real estate in their investment portfolios. REITs are easy to invest in because most REITs trade like stock. A real estate syndication is a group of investors that form a business alliance to purchase a real estate asset.
Now lets look at the key differences.
Liquidity/Volatility: REITs are stocks. REITs have withdrawal limits, but the basic premise is it’s a liquid asset. A syndication is not liquid. An investor must wait until the project is complete to profit. Sounds awful? I actually love this difference. As an investor that trades in the stock market, I am familiar with the volatility of the market. Investors that trade in the market can have significant amounts of their wealth diminished in days. The volatility of the market can be driven by so many factors, including emotions. In contrast to a REIT stock, a syndication can not plummet like a stock in days. This is due to the inability of an investor to act on emotion, or a syndication illiquidity.
Passive Income and Appreciation: A REIT pays passive income through dividends, while a syndications pays them out similarly, as a timed investor distributions. Appreciation in a REIT comes through stock gains, versus a syndication, the asset is sold and profit is distributed.
Tax Benefit: The tax benefits of real estate are so important to creating wealth. The largest difference between a REIT and a syndication is how depreciation is treated. In a REIT, an investor doesn’t get depreciation to offset passive income, where in a syndication investors share in the depreciation. This is a HUGE difference in wealth creation. Passive income generated by the asset, or any of your real estate assets, can be offset. Depending on your tax designation, you may be able to offset more than real estate income. Consult your tax advisor. You knew I had to say that part!
Asset Control: With a REIT you get investment diversification in markets, asset type, asset class to name a few. This is a great benefit of a REIT. Actually, I like this benefit the most of a REIT, versus a syndication. But you have to balance your strategy. I don’t invest in office space or retail, where I am bullish in apartments and self storage. I like markets like AZ and Texas because of the growth cycles we are seeing in the analytics. REITs will diversify for different reasons for a common pool of investors. A syndication would target exactly what you are looking for in your investment strategy.
There are pro/cons to both. I often tell investors to understand their short term liquidity needs, and consult their tax advisor for tax benefits needs. I favor syndications for the tax benefits, passive income treatment and ability of targeting a specific strategy. I enjoy knowing that my wealth isn’t tied to the stock markets emotions. Let’s just say my syndication portfolio has performed much better than my stock portfolio, and with a lot less stress because their aren’t many ups/down.