“90% of all millionaires become so through Real Estate”
– Andrew Carnegie
When thinking about diversifying outside of the stock market in alternate investments, Real Estate is typically the first choice. Many investors are however are overwhelmed by the hassle of finding and maintaining a Real Estate asset. REITs seems to be a popular option for new investors. While REITs offer an alternate solution, Syndicated (group) Real Estate investment is not so commonly known ‘out-of-box’ solution that brings passive and hassle-free solution for busy professionals to invest in Real Estate as well.
One common assumption around syndicated investments is, they are considered similar to REITs. While an overall objective may seem similar from a passive investor standpoint, in the core these two differ significantly from each other. To take a calculated decision on which works best for your style of investing as a passive investor, let’s understand these two types of investments in detail from passive investor point of view.
The Definition :
Before landing into the technicalities, let’s understand in a very simple manner what do they
stand for.
| REIT | SYNDICATION |
|---|---|
| Real- Estate Investment Trust (REIT) is a firm that owns, operates, and manages income-producing real estate portfolio across different markets across an asset class. REITs are publicly registered and traded through major exchanges. Investors can invest via exchange-traded fund, or with a mutual fund. | Real-Estate Syndication is a partnership among investors who combine their skills, resources, and capital to purchase and manage a property they otherwise couldn’t afford. |
| At high level there are 2 types of REITs namely- Equity REIT Mortgage REIT |
Limited partner or LP has a completely passive role in syndication model, most appropriate for the busy professionals. |
What You Own :
The first difference is, ‘what do you own’ when you place your hard-earned money in these vehicles.
| REIT | SYNDICATION |
|---|---|
| Just like stocks, you own a share/ shares in a REIT firm. You do not become the owner of any specific real estate property. The company distributes dividends periodically from the profits as a shareholder. | As a passive investor, you enter the partnership directly as a Limited Partner (LP) in a syndicated investment. You own equity in the property directly, proportionate to the amount you invested Vs combined invested amount by all LPs. You don’t own a specific unit as such. By investing through a syndicator, you are entitled to cash flow from rents and profits made for your share of investment. |
Where do you Invest :
When it comes to Real Estate investments, it is convenient to think of investing in the city around you that you can manage. Both REITs and Syndicated Real Estate Investments allow you to invest across the emerging markets in the USA.
| REIT | SYNDICATION |
|---|---|
| REIT enables you to invest in the portfolio of real estate assets just the way you invest in mutual funds or stocks of a company. You are not part of the selection process around location, team or the actual property that you want to invest in. | Here, you invest directly in real estate investment. You get to know the team, the location of the property, the asset class, various other details along with well-timed reports to make a decision whether or not to move in that investment. |
Tax Treatment :
Everyone dreads the word tax as it moves a significant part of your returns to the good old Uncle Sam’s pocket. Paying taxes not only impacts what you can keep now, but also costs you in terms of future growth of the lost money.
| REIT | SYNDICATION |
|---|---|
| REITs, much like stocks, do not offer much help in taxation policies. On one hand, dividends are taxable, and on the other even sales can trigger a capital gains tax event. | US tax codes provide multiple legal tax benefits towards syndicated Real Estate investments, making the cash flow/profits tax-smart. Depreciation, mortgage interest deduction, cost segregation, and bonus depreciation allow tax deductions to be shared with you directly as a Limited Partner. Refinancing strategy additionally provide a tax-free way to gain return on your investment, while still enjoying the cash flow. |
Minimum Investment and Liquidity :
If you have landed on this page, then you certainly have some resources and are figuring out where to utilize them in the best possible way. We are not here to make a decision for you or to guide you in a particular direction. Your decision can change based on how much money you would like to invest and how important is liquidity for you.
| REIT | SYNDICATION |
|---|---|
| REITs are highly liquid. The minimum requirement to move into this kind of investment is very low. You can start your investment process from as low as 1 share and sell them as and when you wish. | Syndicated investments vary in their nature, but typically you need a minimum investment of $50K and there is a hold period of usual 3 to 7 years. There may be ways in case of emergency to dilute your shares, but it could cost you some compromise on the growth. |
Fee Structure :
Your broker, fund manager or syndicator, whoever you choose, their business model is driven by fee structure, rightfully for them to have a vested interest in the investment. The way these fees are allocated differ significantly.
| REIT | SYNDICATION |
|---|---|
| REITs typically have high up front and sales fees which can go up to 9-10%. Like mutual funds, they also account for higher ongoing fees. | Syndication fees are published upfront and tend to be lower than the REITs. The upfront and range between 1-5%. The ongoing fees are also lower compared to REITs. |
Volatility and Market Impact :
If you are thinking of investing in REITs or a syndicated Real Estate Investment to diversify away from the stocks, think again based on how the fluctuation of stock market would impact the investment.
| REIT | SYNDICATION |
|---|---|
| REITs trade on major exchanges in the public markets, thus they are related to the stock market. They may not have as severe impact of the fluctuation but they are subject to the same conditions that can cause stock prices to gain and lose value. | Syndicated investments are risk managed; in the sense they are backed by real tangible asset. The actual real estate is not directly impacted by the stock market. It has its cycles of growth, expansion and recession etc. Your choice of asset class may provide you further protection. For example, in 2008 Real Estate market crashed, while single family market was severely impacted, multifamily/apartment asset class stood strong and even showed rent growth. |
Return on Investments (ROI) :
The bottom-line of the decision for any investment is driven by the actual returns. While it is impossible to predict the returns in either of these investment types, historical data provides a strong indicator. According to the data collected over the years, these are where statistics stand for the returns.
| REIT | SYNDICATION |
|---|---|
| 20-year annualized returns (1999-2018) 9.9%* | 20-year annualized returns for multifamily/ apartment ~13-17% |
Conclusion :
As we come to the end of this blog, you may realize the choice between syndication and REIT is either very simple or even more complex than you thought. While both vehicles can provide you great returns passively, the case is not of “One Size Fits All”. Based on criteria of control, decision making ability, flexibility as well as returns, your decision can lean one way or the other.
To make it little simple for you, try to answer these questions and then make a decision
- What is my long term or short term goal? Which investment strategy aligns with my goals?
- Do I need to choose an investment that is more liquid or the one that gives me tax benefits?
- Do I need to keep my entry requirement minimum or focus on higher returns?
- Can I keep my investment money on hold for a longer term or have control at the cost of higher fees and lower returns?
| REIT | SYNDICATION |
|---|---|
| If you prefer liquidity and lower minimum requirement against higher growth, tax benefits and decision making capability, REITs could be a good choice for you | If you prefer growth and tax advantages over liquidity and flexibility, among other advantages like decision making, lower fees and direct ownership that’s risk managed by a real tangible asset, Syndication can offer you a tassel-free investment option |
Hopefully by now you have a clear idea on how these two very similar sounding investment vehicles differ significantly. If you think Syndicated investments would suit your overall growth plan, don’t forget to access FREE education around Syndicated Multifamily Investments for passive investors to know more about syndication from scratch.