Investing in real estate is beneficial on several counts, including diversification, high returns, long-term security, steady income, and capital appreciation. However, for many people, buying a property seems like a challenge because of its responsibilities, like maintenance.
For those people, passive real estate investment is a viable option. It involves buying a property jointly with an equity firm (the syndicator) without taking responsibility for its maintenance and upkeep. Passive investment is of various types, including crowdfunding platforms, REITs, joint ventures, and syndications.
But what is the difference between reit vs real estate syndication? These are two of the most popular passive property investment methods. Although each has its advantages, syndication is a more attractive option because it comes with various tax benefits.
Before choosing either of these investment options, it is better to know their differences in detail and their advantages. Here’s some you should know.
How does REIT work?
A real estate investment trust refers to a company that owns and manages properties while giving investors a chance to own stocks in them. Although the investors do not own any part of the property directly, they get a dividend income by selling the stocks.
REITs are of two types: equity and mortgage.
- Equity REIT
Most REITs work in the form of equity, giving investors a chance to own a wide variety of assets and expand portfolios they would be unable to buy themselves. Some types of properties owned by equity companies are apartment complexes, office buildings, and office centers.
- Mortgage REIT
Also known as mREITs, these companies’ primary source of investment is buying mortgages and mortgage-backed securities and earning interest on these. Investors can buy shares in REITs, and most prefer doing so because of the high dividends.
What is real estate syndication?
Real estate syndication is a passive investment option in which an investor owns a real estate property by investing money jointly with a syndicator (which is usually an equity firm). However, the amount involved in buying properties through this method is significantly less than is generally required.
In most deals, the syndicator and passive investors contribute between 25% to 30% of the funds. The lender or the bank provides the other 70% to 75%.
Parties involved in a syndication
There are several parties involved in property syndication, including passive investors (that is, you), syndicators (equity firms), banks (lenders), attorneys, property managers, and certified public accountants (CPAs).
Some differences between the two
REITs and syndications differ in various areas, including ownership, volatility, minimum investment amount, liquidity, and tax benefits.
The main difference is that of ownership. In REITs, you cannot become the direct owner of any real estate asset under any circumstances. In contrast, syndications offer you the chance to become a direct owner in a limited liability company (LLC).
Becoming a direct owner of a property through syndications entitles you to various tax benefits. For example, you can take advantage of depreciation or paper loss (where an asset’s value undergoes theoretical depreciation even though its actual value appreciates). You can mention the cash flow as close to the depreciation as possible.
Minimum investment amount
The minimum amount required for investment is lower in REITs than in syndications. Most equity firms need you to invest between 25,000 USD and 100,000 USD, with an initial investment of 50,000 USD.
Investing in syndications
You can become a part of property syndication by working with an experienced equity firm specializing in value-added multifamily Class B and Class C properties since these have tremendous potential for returns and profits. The task of finding a property and managing it falls on the syndicator.
These are some differences between REIT vs. real estate that you should know about before choosing either. However, syndications are a better option because they give you tax advantages, allow you to expand your real estate portfolio, and enjoy a steady cash flow every month or quarter.