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How Do They Stack Up? REITs vs Syndication



How Do They Stack Up? REITs vs Syndication


You may have heard about REITs (Real Estate Investments Trusts) in the news during the 2008 financial crisis or in the more recent market crash that occurred when the Coronavirus hit the US in March 2020. What you probably didn’t hear about during those events is what happened to syndications. This is because real estate syndications are less widely known and are private investments.


If you have been thinking about investing in real estate or possibly expanding your investment portfolio this question may have been on your mind; what is the better passive investment between REITs and Real Estate Syndications?


REITs originated in the 1960s in the US and have gained popularity amongst investors over the last few decades and are a more common household name but what exactly is a REIT?


What is a REIT?


A REIT is an entity that invests in several different real estate assets based on the mandate of that REIT. Someone that invests in a REIT is effectively investing in the company that invests in this portfolio of assets in a similar manner that an investor invests in a basket of stocks when they buy an Exchange Traded Fund/Mutual Fund. A REIT is like a mutual fund that has real estate.




What is a Syndication?


Syndications, on the other hand, involve numerous investors pooling cash together for the direct purchase and investment in real estate using an LLC (limited liability company) to purchase that property. In this LLC structure each investor is a partner and owns a share of the LLC. Syndications have only started to get more attention recently due to the advent of equity crowdfunding with the 2012 JOBS act that allowed for equity crowdfunding. Crowdfunding is now taking something that was previously private and making it a more house hold concept.


We will focus on single asset purchases in this article as opposed to pooled funds which may share some similarities with REITS.




How do REITs compare to Syndications?


So how do REITs stack up against Syndications? What are the similarities and differences between REITs and Syndications? We will look at several different categories to see how the two compare:

  • Work Required By The Passive Investor

  • Diversity

  • Barriers to entry

  • Returns

  • Cash Flow

  • Taxes

  • Liquidity

  • Volatility In Value




Work Required By The Passive Investor


REITs


Investing in (public) REITs is like investing in stocks and investors enjoy the passive income of real estate without the headaches that come with being a landlord. As with any investment in the stock market, investors should do their upfront due diligence to select the best REIT to invest in.


Syndication


Passive investing in syndication provides hands off income for the investor. There is work required upfront to find syndication opportunities and reviewing investment opportunities to choose which one to invest in. No on-going work is needed from the investor, just sit back relax and collect your cash flow.






Diversity


REITs


Due to the nature of REITs (an investment vehicle that holds several different assets) it inherently provides diversity and risk mitigation. A REIT may allow an individual investor to purchase one REIT stock and the underlying assets in the REIT may be of different markets and asset classes ranging from residential to commercial real estate.


Syndications


When investing in a syndication you are purchasing one asset. The result of your investment is concentrated and highly dependent on the performance of that one property and investment sponsor. It is harder to diversify in a syndication than when investing in REITs. An investor may need to have a decent sum of money to diversify their investment portfolio of real estate syndications.





Barriers to Entry


REITs


There are many REITs available on the stock market. This allows practically anyone with enough money, often less than $100, to purchase a share in a REIT.


Syndications


Syndications require a more rigorous review of the investor to