Syndicates VS REITs

People often ask why they should invest with a syndicator (private investors group funds together to buy an investment property) instead of with a public, institutional investment firm through a real estate investment trust (REIT). REITs have many perceived benefits such as their liquidity as well as the confidence of investing alongside tens of thousands of people in firms with years of experience. However, for many, REITs do not align with their investment philosophy. First, an investor purchasing shares of a REIT have no control over which assets are purchased, how they are managed, and which are sold. This lack of control by investors allows the investment firm to operate clandestine and sometimes make acquisitions or dispositions based on short term benchmarks because they are beholden to quarterly reports.

Another point of contention is the volatility REITs are subjected to. Just like any stock, the public can often value a REIT based on short term notions of risk or forecasted growth. This chart shows just how volatile a REIT’s share price can be. On the other hand, for many investors, volatility is a reasonable trade they are willing to make in order to have the ability to get in and out of a position at any time. By participating in a syndication where an investor truly owns a portion of the real estate, an investor does not have the same luxury and will have to speak to his or her managing partner as to how best to deal with getting out of an ownership position if necessary.

Lastly, most savvy investors’ main gripe about REITs are the exorbitant fees! The data can do the talking here as an article from www.realcrowd.com delineated the various fees of a REIT, “A private REIT can charge up to 17% up front before your investment even touches the real estate. A recent REIT prospectus disclosed the following fees – sales commissions=6.5%, dealer manager fee=3.5%, organization and offering expenses=2.42%, acquisition fees=1.75% and acquisition expenses=0.96%!!! For every $100 you invested, less than $85 actually went towards the real estate! Additionally, a REIT is only required to distribute 90% of the income generated by its properties back to investors, significantly lowering overall returns.” Of course these high fees result in a lower average return distributed back to the REIT’s investors. On average, a REIT’s dividend is 3.4% which is decidedly lower than even the most conservative REAL real estate investment.

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