Real Estate Syndication vs. REIT

What is Real Estate Syndication?

A real estate syndication involves a sponsor, such as Excelsior, and a group of investors. When you invest in a real estate syndication, you essentially pool your funds with other investors and purchase equity in a property, proportional to the amount you invest.

The sponsor does all the work of sourcing the deal and then provides prospective investors with details, including the location of the property, information about the market environment, all financials, and an overview of each tenant. The individual can then choose how much they want to invest.

From there, the sponsor handles all back-end operations, including property management and quarterly reports, and the investor can simply sit back while their investment generates passive cash flow. With this method, investors are able to own a share of an asset they may not have been able to purchase on their own, such as a multifamily project or a large commercial property.

What is a REIT?

A real estate investment trust is a company that invests in multiple properties. Investors buy shares in the REIT and own a portion of the company, rather than owning part of a specific property.

REITs are often publicly traded companies, but they can also be privately owned.

Similar to a real estate syndication, investors are able to generate passive income while the REIT handles all property management, sourcing, and operations.

Key Differences Between Syndication and REIT

The biggest and most obvious difference between a REIT and a real estate syndication lies in the specific asset people are investing in. With a real estate syndication, investors have equity in a specific property, whereas REIT investors own a share of the company that owns the properties. This distinction has several significant implications for investors in terms of their returns, tax benefits, and levels of control.

If you’re trying to decide between investing in a real estate syndication and a REIT, here are four key differences to consider.

1. Control Over Investments

Investors in a real estate syndication have the opportunity to evaluate deals and choose to invest in a specific property. The deal sponsor will provide them with all the information they need to assess a potential investment and make sure they’re comfortable with putting money toward the property.

When you invest in a REIT, on the other hand, you are investing in a company that owns different deals and properties. While you can assess the experience and credibility of the company, you don’t have control over which properties the REIT will invest your money into.

2. Barriers to Entry

Because many REITs are publicly traded, there is a low barrier to entry for investors who wish to purchase a small number of shares in the company.

Real estate syndications, however, are only available to accredited investors, and most syndication sponsors will have a minimum investment threshold. While this amount is still significantly less than the cost of purchasing an entire comparable asset, it does mean that not every interested investor will qualify.

3. Liquidity

Just like any other stock, investors in an REIT can buy and sell their shares at any time. This allows for greater liquidity than a real estate syndication, where you may be required to hold onto the asset for a set period of time as part of your investment agreement.

4. Tax Benefits

One of the biggest advantages to investing in a real estate syndication instead of a REIT are the tax benefits.

Because real estate syndications involve investing directly into a property, participants are eligible for certain tax deductions, including depreciation. This deduction allows you to write off the value of your investment over time. In this way, real estate syndication can both generate passive income and also lower the amount of taxes you pay on your ordinary income (such as income earned from a W-2 job).

A REIT investment, on the other hand, is treated as ordinary dividend income. This means that you pay higher taxes on that income and you are not eligible for depreciation and the other deductions associated with real estate investing.

In Conclusion…

REITs and real estate syndications each have unique advantages for investors. Depending on the amount you’re willing to invest, your ideal timeline, and your accreditation status, one option may work better than the other.

In general, if you’re looking to build a portfolio by having partial ownership over a specific property, then real estate syndication is an effective way to accomplish that goal. To learn more about the syndication opportunities we can offer at Excelsior Capital, join our active investment community today.