What is real estate syndication?
In a real estate syndication, a sponsor collects money from individual investors to buy an investment property. Each investor becomes a part owner of the purchased asset. The sponsor, also known as a syndicator, is responsible for identifying and managing the property.
How do real estate syndications work
Real estate syndications allow investors to purchase property without its attendant hassles. The sponsor does the heavy lifting, identifying the property, conducting due diligence, evaluating project risks, structuring the deal, and completing the purchase.
Investors benefit in several ways. They can add to their CRE portfolio without getting involved in the nitty-gritty of the real estate transaction. This aspect of syndications helps investors overcome one of the greatest commercial real estate challenges – the complications that property investing can involve.
A real estate syndication also lets multiple investors make a group investment in a property they cannot afford individually. However, some investors use syndications differently. They may have the required funds to buy an expensive property but may not want to risk a large sum. The syndication allows such investors to spread their risk by limiting the amount they deploy in any one asset.
What is a REIT?
A REIT- or Real Estate Investment Trust – is a company that buys real estate assets with the funds it raises from its shareholders. Many REITs trade on the stock market. A REIT invests in income-producing properties and distributes most of its income to its shareholders as dividends.
How do REITs work
A REIT operates somewhat like mutual funds do. It pools money from investors to buy properties in the same way mutual funds collect money and invest it in stocks or debt instruments. The Internal Revenue Service requires REITs to have at least 100 shareholders and at least 75% of their assets in real estate, cash, or U.S. Treasuries.
Another essential rule REITs must comply with is paying their shareholders 90% or more of their taxable income as dividends. Successful REITs focus on generating a positive cash flow so that they have adequate funds to meet their dividend payout requirements. Remember that a REIT is like a mutual fund in some ways, but the two have important differences.
Real estate syndication vs REIT: Key differences
In this section, we will examine the principal differences between real estate syndication and real estate investment trusts. Both real estate strategies have distinct features.
1. Investment structure
Several investors pool their funds to buy a property in a real estate syndication. Each investor owns a share of the purchased assets. The structure of syndication involves a sponsor or general partner who takes operational responsibilities. Additionally, there are limited partner investors—passive investors who contribute capital for purchasing property.
A REIT is a company. The shareholders do not hold property directly; the company owns the assets.
2. Number of assets
Real estate syndications typically involve purchasing one property. A REIT, however, is unlike real estate syndication. It spreads its investments across multiple properties.
3. Accessibility and liquidity
Real estate syndications require investors to contribute a high minimum amount. Although the sum can vary, it is usually upward of $50,000.
It is far easier to invest in real estate investment trusts. Many REITs trade on the stock exchange, and you can buy shares in them in the same way you would invest in the stock of a corporation.
4. Barriers to entry
Anybody can buy shares in a REIT. However, real estate syndication investments are typically available only to accredited investors. The SEC defines an accredited investor as someone with an annual income of $200,000 or a net worth of more than $1 million.
5. Investment risk and control
An investor in a REIT has a low degree of control over the properties the real estate investment trust invests in. However, some REITs focus on specific segments of the real estate market. For example, you can select a REIT that owns and manages single-tenant buildings, or one that owns wireless communication towers.
A real estate syndication offers a greater degree of control over the investment. An investor can select a sponsor specializing in a specific property category. Regarding risk, REITs are generally low-risk investments. Syndications can be riskier but more rewarding.
6. Tax implications
Income from a REIT is taxed as dividend income, which can increase the investor’s tax burden. Real estate syndications, on the other hand, provide some tax benefits to investors. They can take advantage of depreciation and other tax deductions.
7. Owning vs investing
In a real estate syndication, the investor is a part owner of the property that is purchased. A REIT works differently. An individual buys shares in the company that owns the property. The underlying real estate is owned by the company and not directly by the person who holds shares in the REIT.
8. Historical returns
The following table provides an idea of the historical performance of publicly traded REITs:
Price return of S&P United States REIT Index
| Period | Annualized return over the period |
| 1 year (as of 31 October 2024) | 30.84% |
| 3 years | -2.38% |
| 5 years | 0.71% |
| 10 years | 2.25% |
The returns that real estate syndications can provide vary. This mode of investing carries a higher degree of risk but can also offer greater returns. However, it is reasonable to expect an annualized return of between 7% and 12% in this type of real estate investing.
A table summarizing the key differences between real estate syndications and REITS:
| Aspects of differentiation | Real estate syndications | REITs |
| Investment structure | Investors are part-owners of the property. | Investors are shareholders in the REIT. |
| Number of assets | Typically buys one property. | Buys multiple properties. |
| Accessibility and liquidity |
|
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| Barriers to entry | Available to accredited investors. | Anybody can invest. |
| Investment risk and control | High-risk, high-return. Greater control over the property purchase. | Lower risk, lower return, and a lower degree of control over the property purchase. |
| Tax implications | A tax-efficient investment. | Income from the REIT is taxed as dividend income. |
| Owning vs investing | The investor is a part owner of the property. | Indirect ownership. |
| Historical returns | Returns can vary. You can reasonably expect an annualized return of 7% to 12%. | The S&P United States REIT Index has provided an annualized return of 2.25% over the last ten years. |
Real estate syndication vs REIT: Pros and cons
In this section of the post, we will discuss the pros and cons of real estate syndications and REITs.
Pros of real estate syndication
- Control and flexibility: Investors have a clear idea about the property that will be purchased with their funds.
- Potential for higher returns: A real estate syndication is a high-risk, high-return investment.
- Aligned interests: The sponsor’s interests closely conform to those of the limited partners, which can be a huge plus for investors.
- Tax benefits: The income and distributions from the syndication pass through to the limited partners, making the investment highly tax-efficient.
Cons of real estate syndication
- Capital raising: Raising capital can be a challenge for the sponsor.
- Operational responsibilities: If the sponsor does not efficiently perform operational activities, this can affect the returns that the syndication provides.
- Risk management: Real estate syndication investments are riskier than REIT investments. Your money is used to buy one property, and if any complications arise, it can jeopardize your returns.
Pros of REIT
- Diversification: REITs invest in multiple properties. The number can even run into the hundreds. Extensive diversification can help spread the risk investors face.
- Liquidity: Publicly traded REITs are highly liquid. With this type of real estate investing, you can sell your shares on the stock exchange and access funds in a matter of days.
- Passive income: Besides liquidity, REITs provide a stream of passive income. Investors do not need to worry about property management or finding tenants.
- Professional management: REITs are handled by a team of professionals with specialized industry domain knowledge. Investors can be confident that their capital will be well-managed, and their assets protected and exposed to the least possible risk.
Cons of REIT
- Limited control: The REIT’s management will decide which properties it invests in, and investors have no control over this.
- Market volatility: Publicly traded REITs are exposed to market volatility in the same way as equities.
- Management fees: The different types of management fees a REIT charges can dilute an investor’s returns.
- Tax considerations: The payout from a REIT is taxed as dividend income. Syndications offer tax benefits in the form of tax deductions unavailable in REIT investments.
Case studies and real-world examples
- Example of a successful real estate syndication
$50 million was raised from 3,000 investors in 1931 to build the Empire State Building in New York City. This is one of the better-known examples of a real estate syndication deal.
- Example of a high-performing REIT
SL Green Realty Corp. is a REIT that owns New York City office buildings and shopping centers. The company’s stock price has appreciated by 135% over the last year. (data on 21 November 2024).
Real estate syndication vs REIT: Which is right for you?
Investors can choose between a real estate syndication and a REIT based on their risk appetite and investment goals. REITs are relatively safe investments, are liquid, and can be a good source of passive income.
Real estate syndications provide a high-risk, high-return investment opportunity. They are well-suited for accredited investors with a high-risk tolerance.
The bottom line
A diversified investment portfolio should include real estate. Both REITs and real estate syndications provide a way to gain exposure to property investments. REITs have a lower entry barrier and are a good source of passive income. Real estate syndications are more appropriate for experienced high-net-worth investors.
