Real estate syndication and REITs (Real Estate Investment Trusts) both offer investors the opportunity to earn passive income by investing in real estate online.
But there are several differences between real estate syndication vs. REITs. In this article, we’ll define both terms and discuss the 10 key differences between the two investment models. By the end of this article, you’ll be able to decide which investment vehicle is best for you based on your investment goals.
What Is a Real Estate Syndication?
Real estate syndication, like real estate crowdfunding, is when money is pooled from multiple investors to fund a real estate investment. The investment project is managed by a sponsor, who oversees the acquisition, construction/renovation, and disposition or ongoing management of the property.
Syndication offers flexible real estate investment opportunities with passive returns.
To learn more about syndication and how it works, check out our article, Real Estate Syndication Explained.
What Is a REIT?
A REIT is a company that owns and operates income-producing properties. Investors can buy shares of a REIT in the same way that they buy stock in any company on the stock exchange. When you invest in a REIT, you are entitled to a percentage of the income generated by the REIT’s properties, which is disbursed in the form of dividends.
You can learn more about REITs and how they work by reading REITs Explained.
10 Differences Between Real Estate Syndication and REITs
As you consider which of these passive investing models is right for you, pay attention to these 10 differences between REITs and syndication.
- Number of assets held in an investment
- Control over investments
- Investment minimums
- Tax benefits
- Average returns
1. Number of Assets Held in an Investment
With REITs, your capital funds an entire portfolio of real estate assets. It could be just a handful of properties, dozens of properties, or even over a hundred properties. This offers automatic diversification for your investment portfolio.
But with syndication, your investment goes to one specific property. Of course, you might decide to invest in multiple syndication projects to diversify your investment. But each investment would be in one distinct property.
2. Control Over Investments
With REITs, your capital funds an entire portfolio of real estate assets. Some REITs specialize in apartments, others in commercial spaces, and some have a hand in multiple asset classes. A REIT could, for example, own an apartment complex in San Diego, a shopping center in Santa Barbara, and an office building in Irvine. You have no control over which assets are included in your REIT. Interestingly, your REIT might not even disclose which properties are included in the portfolio.
With real estate syndication, you choose the specific project(s) you want to invest in. You get to see the property address, project plans, and projected financials for the deals you are considering. Then you can decide which properties best suit your preferences.
3. Investment Minimums
Compared to traditional real estate investing, both syndication and REITs offer comparatively low investment minimums. But because many REITs trade like public stocks, they can take on more investors and offer lower investment minimums. A share of a REIT could cost somewhere in the $1,000 - $25,000 range. You may even be able to purchase partial shares for just a few hundred dollars.
Syndication minimum investment range widely, depending on the type of project being funded. A house flip, for example, may offer lower minimums than a multi-family development. In general terms, you can expect minimums to lie somewhere between $10,000 and $50,000.
Both REITs and syndication have dramatically improved the liquidity of real estate. Traditional real estate investing lacks liquidity as selling a property requires time and money. But today, selling a real estate investment can be as simple as selling your shares on the stock exchange.
REITs are more liquid than syndication projects, particularly when the REIT is publicly traded. You might be free to sell your shares at any time.
Syndication projects are more liquid than traditional real estate investments but less liquid than REITs. You typically need to maintain your investment for the duration of the project. This could be as little as six months for an investment like a fix and flip. But it could also be five years or more for projects like long-term multi-family value-adds.
5. Tax Benefits
Income from REITs is taxed as normal dividend income. This means it’s included in your earned income and the tax rate is based on your tax bracket.
However, there are numerous real estate syndication tax benefits! For example, you can claim deductions from your syndicate holdings, including property depreciation, which gives you “paper losses” to help bring down your tax bill. And, as long as your investment is held for more than one year, your proceeds can be considered “capital gains” rather than earned income, which comes with a lower tax rate.
If you’re looking to minimize your tax liability, syndication is the better option.
REITs are independent business entities. You can be a shareholder in a REIT without being a member of the company. This means you’re entitled to your share of proceeds, but you do not have any ownership claim on the real estate owned by the REIT.
Syndications, on the other hand, typically offer an actual ownership stake in the underlying real estate. A separate ownership entity (like an LLC or Trust) is created for each syndicate project, and investors in that project are made members of the ownership entity.
7. Average Returns
Both REITs and syndication outperform the stock market in long-term comparisons.
From 1971 through 2021, the average annual return for the S&P500 index was 12.58%. During the same period, REITs averaged 13.52%.
Because syndication was a product of the JOBS Act of 2012, there isn’t such a long history of data available. And the returns have a wide margin depending on the syndicate sponsor and the individual projects. Having said that, experts estimate annualized syndication returns at 15%+.
Here at Gatsby Investment, we’re proud to say that, from 2017-2022, we saw average annualized returns of 24.22%! This is one of the biggest benefits of investing in syndication with a reputable company.
The greater the value swings from one day to the next, the more volatile an investment is. The stock market, for example, is considered volatile because stock prices can swing wildly over the short term.
There are several reasons why real estate is less volatile than the stock market. One of the main reasons is that longer hold periods increase stability. When investors can’t “panic sell” their assets, the market remains more stable as a whole.
For this reason, syndication is less volatile than REITs. Share prices on REITs can change dramatically if investors overreact to market news and suddenly sell off shares. But with syndication, the pacing is a bit slower, making your investment more reliable.
While fees can vary widely among REITs and among syndication companies, the general consensus is that REITs charge higher fees than syndication companies.
Furthermore, REITs are believed to provide less transparency about those fees than syndication companies do.
It’s always worth asking about the fee structure before making any investment.
REITs are easily accessible, as many of them trade on the stock market, and are open to all members of the public.
Syndications, however, are classified differently by the SEC (Securities and Exchange Commission). Syndications still register with the SEC, but they are exempt from certain reporting requirements that other securities are held to. This means that syndication projects are typically only open to accredited investors.
Explore Real Estate Syndication Investing with Gatsby Investment
If you are a non-accredited investor, looking for a highly-liquid way to invest in real estate, REITs might be a great fit for you.
And, if you’re an accredited investor, interested in maximizing your return potential on a passive real estate investment, syndication might be a better option for you.
Investing in a real estate syndication project is quick and easy with Gatsby Investment! We’re a real estate syndication company, specializing in low-risk, high-yield, value-add projects. We welcome all accredited real estate investors to explore our investment offerings and join our growing base of satisfied investors today!