Real Estate Syndication vs REIT: Which Is the Best Investment Strategy for You
You may be wondering, “What is the best approach to take when investing in properties?” “Should I invest in a real estate syndication or a real estate investment trust (REIT)?”
Well, both of these methods are great ways to invest in properties, but it is important to remember that they have some key differences.
In this blog post, we will compare and contrast real estate syndication vs REIT, so that you can make an informed decision about which strategy is right for you.
What Is a Real Estate Syndicate?
Real estate syndication is a pooled investment in real estate. In other words, a group of investors comes together to invest in one or multiple properties. This can be done through a real estate company or an investment fund.
Real Estate Syndicate Pros and Cons
The main advantage of real estate syndication is that it can offer investors access to larger and more expensive properties than they could purchase on their own. It is also a good way for inexperienced investors to get started in the real estate market, as they can partner with more experienced investors.
On the downside, this approach involves a high degree of risk. There is also less liquidity with syndicated investments, meaning it can be harder to sell your shares if you need to cash out early.
What Are Real Estate Investment Trusts?
A REIT is a company that owns or finances income-producing real estate assets. Just like other stocks or bonds, you can buy shares of a REIT on the stock market.
REIT Pros and Cons
The main benefit of investing in a REIT is that it offers liquidity, diversity, and stability. Because you are buying shares on the stock market, you can sell them at any time if you need to cash out. Additionally, real estate is a relatively stable investment compared to other types of investments, like stocks or commodities.
On the downside, REITs typically have lower returns than direct real estate investing. They are also more sensitive to interest rate hikes, as this will affect their profitability.
Real Estate Syndication vs REIT: Key Differences
To get an in-depth idea of which is the right option for you, here are the key differences between these two approaches that you should know.
Minimum Required Investment
The main difference between real estate syndication and REIT would be the minimum required investment. With real estate syndication, the minimum investment can be as low as $25,000.
However, the minimum investment for a REIT is much higher. In order to buy shares of a REIT, you will need to have at least $500 in your brokerage account.
Investment Type
Syndications are typically direct investments in real estate properties, while REITs invest in real estate-related securities. This means that when you invest in the former, you are actually purchasing a piece of property.
On the other hand, when you purchase shares of a REIT, you are investing in a company that owns real estate. This company may own properties itself, or it may finance real estate owned by others.
Taxes
The tax treatment of real estate syndications and REITs is also different. With syndication, you will usually be taxed as if you are the owner of the property. This means that you will have to pay taxes on any rental income earned from the property, as well as any capital gains when you sell your shares.
However, when investing in real estate investment trust, you will typically be taxed like a regular stock investor. This means that you will only pay taxes on dividends received from the REIT, and not on any capital gains.
Number of Assets
Real estate syndicates typically have fewer assets than REITs. This is because the former is focused on pooled investments in specific properties, while the latter has a large pool of assets that it invests in.
Level of Ownership
When you invest in a real estate syndicate, you typically become an owner of the property. This means that you have a say in how the property is managed and can participate in any profits generated from it.
However, when you invest in a REIT, you do not have this level of ownership. You are simply a shareholder in the company and will not have any control over its operations.
Investment Access
With syndication, you typically need to be an accredited investor in order to participate. This means that you must meet certain income or net worth requirements.
On the other hand, a REIT would allow anyone to invest regardless of their accreditation status.
Liquidity
Real estate syndications are typically illiquid investments, while REITs offer liquidity. This means that it can be difficult to sell your shares in a syndicate, and you may have to wait years to receive any profits.
On the other hand, because REITs are traded on the stock market, you can sell your shares at any time.
Amount of Expected Returns
Real estate syndications typically offer higher returns than REITs, but they are also riskier.
In terms of cash flow, REITs provide a regular stream, while syndicates do not. This is because the former generates income from their real estate holdings, while the latter relies on the success of the properties they invest in.
Ability to Diversify
The best real estate investment trust offers investors the ability to diversify their portfolios, while real estate syndicates do not. This is because REITs invest in a large pool of assets, which reduces your risk.
On the flip side, real estate syndications allow you to choose specific properties that you want to invest in, which gives you more control over your investment.
Legal Requirements
The legal requirements for setting up a real estate syndicate are much more stringent than those for a REIT. This is because syndication is regulated by the U.S. Securities and Exchange Commission (SEC), while REITs are not.
Price per Share
Finally, the price per share for a real estate syndication and REIT can also be different. Typically, real estate syndication will usually have a higher price per share than a REIT, as it offers investors access to more expensive properties.
Seeking Advice from the Experts
Now that you know the key differences between real estate syndication and REIT, it’s time to seek the advice of an expert who can help you determine which investment strategy is best for you by assessing your needs. They can also provide you with more information on how these two approaches work.
You can also do your own research and read more articles on real estate syndication vs REIT explained by individuals who have already seen success in investing. This will help to give you a good foundation on which to make your final decision.
Verdict
When it comes to choosing between real estate syndication vs REIT, your decision ultimately boils down to your goals as an investor. If you are looking for stability and liquidity, then investing in a REIT may be the better option. However, if you are willing to take on more risk for the potential of higher returns, then real estate syndication may be a better fit.
If you are new to these strategies, it is important to do your own research and, again, speak with a financial advisor to find out which investment strategy is right for you.
For more of the latest advice and information on real estate and business, feel free to check the other articles on our site!
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