Real Estate Syndication vs. REIT: Four Differences You Must Know in 2022
Real estate investments sound lucrative to many people, but they involve some technical concepts. You’d find things like property ownership, tenancy, rentals, and lease agreements. They all have their peculiarities, adding up to deliver returns on your investment.
However, some people might not be interested in the “hands-on” approach to real estate investments, and it’s not hard to see why. For one thing, you’d sometimes have to oversee your portfolio’s day-to-day operations and welfare. That’s especially true for landlords responsible for maintenance and repair works on their tenancy property.
If you’re looking to invest in a real estate unit passively, you could opt for a REIT portfolio or a real estate syndication. However, you may want to know which is the best for you. An extensive online comparison, such as https://www.peoplescapitalgroup.com/post/real-estate-syndication-vs-reit-differences-and-comparison, is imperative, as they help you to understand the pros and cons to each of them.
We’ll explain the critical differences between REIT and real estate syndication in the paragraphs below, giving you insight into making the right investment decision in 2022.
REIT vs. Real Estate Syndication: Definition and Features
A REIT (Real Estate Investment Trust) is a registered company that pools money to invest in commercial, income-generating real estate units. In simpler terms, REITs invest in real estate commodities, while people invest in REITs. That way, you’d indirectly be investing in those properties.
On the other hand, real estate syndication involves directly investing in a specific real estate asset on your behalf.
Regarding real estate syndication vs. REIT comparisons, the differences between both investment types go beyond their direct and indirect approaches. Below are four other distinctions between them:
1. Number of Investment Assets
Real estate syndication vs. REIT comparisons often include assets since each differs in the number of investment assets it allows you to have.
- REIT
Typically, a REIT holds different property portfolios spanning various markets. They could have asset classes that include apartment buildings, shopping complexes, and utility buildings.
You’d invest in a REIT, and they would then invest in a real estate asset for you. These companies hold autonomy to decide what types of portfolio they’d like to have for investors. As a result, you don’t get to choose the specific property type in which you want to invest.
While that might seem a downside, the REIT approach is an excellent way to diversify your real estate investment strategies.
- Real Estate Syndication
Real estate syndications allow you to choose what asset type you’d want for your investments. Generally, they offer single property investment offerings and give you crucial details like the property location and the total units available for sale. You’d also get the business plans and other financial insights into the property.
However, some of the best real estate syndication companies offer blind funding, like in REIT’s case. You get a broader range of choices and access as a result.
2. Investment Assess
Investors get to know about and invest in REIT and real estate syndications a lot differently. It’s one of the most crucial points to real estate syndication vs. REIT comparisons.
- REIT
Real estate investment trusts are generally public companies. Most of them have listings on major stock exchanges across the world. Investors can put their funds into these companies directly, either through ETFs (Exchange Traded Funds) or Mutual Funds.
Furthermore, investment access to REITs takes much less time, and you can complete a portfolio funding in minutes.
- Real Estate Syndications
Real estate syndications are discreet in their availability, as they don’t have public stock listings. They also don’t advertise their portfolios, as SEC rules against it. As a result, access to investing in a real estate investment syndicate takes more effort and time. You’d have to be close to the system to get an investment deal from someone you know who might have it.
Beyond that, completing a deal in syndication takes weeks. Through that time, the investor has to review the investment lead, sign the paperwork and pay the necessary fees before funding the opportunity. However, you should start receiving returns within a few months of completing the investment acquisition process.
In some cases, real estate syndications wouldn’t sell assets directly to people. You’d have to be a registered investor, adding an extra step to accessing investment opportunities in the syndication.
3. Ownership Policy
Both real estate investment types specify their own terms differently for investors.
- REIT
Since REITs are publicly-traded, investors only get to buy shares of the various assets the companies put on sale. As such, you don’t own the actual property you’re investing in but a share from it.
It helps the REITs, as you don’t know the exact asset you’re investing in from the beginning. Such an arrangement is similar to what investors get when buying stocks in Facebook and Microsoft, for example.
- Real Estate Syndication
Real estate syndication companies specify that investors buy into and own specific properties in their portfolios. The same is true for any group real estate investment you might choose.
A part of the document you’d sign under syndications is the transfer of ownership for the property – that are mostly LLC entities – to you. If you’ve got general or limited investment partners in the deal, they get to share the direct ownership with you.
4. Tax Benefits
General real estate investments could get you tax benefits over a certain period. However, the degree to which you get tax reductions and other benefits vary between REIT and real estate syndication investments:
- REIT
You could get limited tax benefits when you fund a REIT investment. That’s because you’re investing in the company, instead of the real estate assets they trade. You’d also get help as the property depreciates in its value on paper.
However, such rebates would only be in effect before receiving your dividends. That means there are no significant tax breaks after the fact. The depreciation advantage also doesn’t do much, as you can’t add it to another investment income.
- Real Estate Syndications
These have more major tax benefits for investors since they take a more direct approach to property ownership. Syndications allow you to get tax reductions and rebates on your property, including the depreciation advantage.
If you could declare an accelerated depreciation on your assets, the benefits would become more extensive. In many cases, the depreciation advantage becomes more significant than the cash flow on the property. That’s because the property still makes a profit, even when it’s lost value on paper.
Conclusion
There are various real estate investment strategies you can use in today’s world. Each has its strengths and weaknesses, usually suited to a specific investment need. REITs and real estate syndications are two popular options to consider in 2022, especially when you’re a new investor in the industry.
In reality, none of them is better than the other, which is why we’ve highlighted the ways each handles specific vital details. Also, you’d find some of the pros and cons of real estate syndication companies and REITs relative to your particular investment use case.
