Thanks to unique structures, accredited (and sometimes non-accredited) investors can access multi-million dollar real estate deals through “group” investment strategies.
Real estate syndication and Real Estate Investment Trusts (REITs) are two such investment opportunities.
While they may seem similar at first glance, there are some critical differences between the two approaches. This blog demystifies the real estate syndication vs. REIT discussion to help you become a more informed and confident investor. Plus, we’re looking at why syndication has the edge over REITs for busy physicians and high-level professionals interested in real estate investing.
What Is a REIT?
Don’t be confused by the word ‘trust’ in Real Estate Investment Trust. Instead, consider a REIT, a company that invests and manages commercial properties.
Rather than buying a property outright, investors invest in a REIT to earn dividend payouts. As you invest in a company, you commonly find REITs on stock exchanges. Due to this, it’s a much more liquid investment and subject to market conditions.
REITs will invest in several commercial property types, such as:
- Office buildings
- Warehouses
- Medical centers
- Telecommunication centers and more
There are three types of REITs available to investors:
- Equity REITs
- Mortgage REITs
- Hybrid REITs
Some REITs may invest in a particular asset class, while others may manage a full range of commercial properties.
Physicians can invest in a REIT as they would invest in a publicly traded company by buying shares through a broker or trading platform. However, to invest in a non-listed (or private) REIT, investors must go through an investment specialist such as a trader or financial advisor.
In many cases, REITs are a more accessible investment option than syndications. For example, if you can buy shares, then you can purchase shares in a REIT. However, being easier to access doesn’t always lead to better returns!
What Is a Real Estate Syndication?
While real estate syndication is also a form of group investment, it differs fundamentally from a REIT. So, let’s look at what a real estate syndication is to help clear things up.
A real estate syndication happens when a collection of investors pool their money to purchase an income-producing asset. The closest analogy is that of ‘crowdfunding.’ Unlike REITs, real estate syndications are not publicly listed.
Real estate syndications are administered through a general partnership (or sponsors) team. They manage everything from underwriting to the day-to-day management of the deal. However, unlike a REIT, a real estate syndication is a more exclusive investment option and only accessible to individuals who meet strict financial conditions.
6 Fundamental Differences Between a REIT and a Real Estate Syndication
Are there other differences investors should know about? Yes! The following fundamental differences between a REIT and real estate syndications can help real estate investors decide which investment strategy is ideal for their goals.
1. Minimum Investment Amounts
REIT: Since a REIT is a publicly traded company, the price of the shares is set by the market and the forces of supply and demand. You could get started investing in REITs from as little as a couple of dollars per share into the hundreds.
Syndication: Real estate syndication commonly has minimum investment amounts ranging from $50,000 to $100,000 (the most common is $50,000). More capital is required to start investing in syndications.
2. Number of Assets in the Portfolio
REIT: REITs are generally diversified across a particular asset class, such as residential or commercial. Therefore, a REIT may own several commercial offices across the country if that asset type is the REIT’s focus. Investors making a REIT investment can therefore be selective about the type of investment class they are making—but not the investments themselves.
Syndication: When investing in a real estate syndication, you generally invest in one income-producing asset, such as a multifamily estate complex. Due to this, investors in a syndication are much more informed about the asset, such as the location, demographics, job markets, amenities, and more.
3. The Question of Ownership
REIT: When you invest in a REIT, you purchase shares of ownership in the company, not the properties within the portfolio. Like buying shares in Tesla, you’re not buying the cars themselves but rather a corporation share.
Syndication: Due to the structure of a real estate syndication, investors invest directly in the income-producing asset along with fellow limited partners and the general partners (who also invest).
4. Liquidity
REIT: As discussed, REITs are a far more liquid investment meaning you can sell or purchase more shares at any time.
Syndication: In contrast, syndications are considered longer-term investments and commonly include minimal hold times. Accessing the investment funds will not be possible until the legal document known as a “private placement memorandum” is specified. For example, a standard hold time is five years.
5. Tax Benefits
REIT: Generally, the income earned from REIT dividends is considered ordinary and subject to your yearly marginal tax rate. There may be exceptional cases if this income is designated as capital gains or return of capital. However, this will be specified in your yearly investor report.
Syndication: One of the leading advantages of real estate syndications is the opportunity for tax benefits. High-level real estate syndicators (such as Viking Capital) leverage tax offsetting strategies such as accelerated depreciation and cost segregation to provide the utmost value to the investors.
6. Returns
REIT: REIT investors enjoy dividend payouts from rental income on the properties in the portfolio. A REIT must pay 90% of its revenue to shareholders. However, this is subject to conditions such as interest rates and the propensity for property markets to ‘bubble’ over time.
Syndication: Investors in a syndication enjoy monthly payouts from rental income. Plus, owners of the property also enjoy a share of the asset’s sale at the end of the lifetime of the deal. Thanks to appreciation, this is often a substantial sum of money.
Why Choose a Real Estate Syndication?
Busy physicians and accredited investors benefit most from a multifamily real estate syndication.
Through experience and a proven track record of success, Viking Capital creates a better investor experience through our personal experiences in the medical profession. As a result, we’ve created an investment opportunity for medical professionals to build generational wealth without managing real estate assets daily.
Accelerate Returns Through Multifamily Real Estate Syndication
While different investment options suit different needs, once you’ve reached the accredited investor level, the tax benefits, appreciation, and ownership status of multifamily real estate syndications present a better overall investment experience for high-income investors.
If you want to get started on your investment journey or are ready to learn more about how syndications can help you build generational wealth, reach out to the team at Viking Capital today!
