Passive Investor Series Part 7: REIT vs Syndication

As a passive investor, real estate is an excellent investment vehicle for income and capital growth. There are several paths to owning real estate including purchasing yourself or with a partner. On Wall Street, it is often recommended to invest in REITs to diversify your investments into real estate. However, a lesser known path in passive real estate investment is through a hybrid approach to limited partnership investment via syndication.

In this article, we will discuss what are REITs and syndications? How are they similar and different? Which one is right for you? Let’s begin!

WHAT IS A REIT?

A real estate investment trust (REIT) is a company investing in real estate. The company sells shares in the REIT which you buy similarly as buying and selling stocks. There are many different types of REITs trading in all different types of industries and sectors including residential real estate, multifamily real estate, data centers, cell towers, etc.

WHAT IS A SYNDICATION?

A syndication is a pooling of funds from various investors for an investment. There are limited partners who are passive investors with very limited (if any) voting rights and general partners who take an active role in acquiring and operating the asset.

A syndication can invest in almost anything with real estate being one of the more common syndicated investments. The are typically single asset investments, which means they are investing in a single asset or property for the duration of the syndication. There are also syndication funds that can invest in multiple properties or other syndications of similar asset types.

REIT AND SYNDICATION SIMILARITIES

Both REITs and syndications allow the investor to invest passively. As a passive investment, REITs and syndications are some of the most reliable.

Both REITs and syndications allow you to diversify your investments into various asset classes including real estate.

REIT AND SYNDICATION DIFFERENCES

REITs

#1 Liquidity

REITs are more liquid than a syndication. If you aren’t happy with the performance of a REIT, then you can easily sell the REIT.

#2 Liquidity

REITs are easily accessible. They can typically be found on your favorite investment platform where you buy and sell stocks.

#3 Single Source for Diversification

REITs are usually diversified into many different assets within the single REIT. This allows you to easily enjoy large diversification into a specific asset or sector.

#4 Investment Minimums
REITs will have a smaller minimum investment amount compared to a syndication. Those with limited funds who want to invest in real estate can purchase a REIT for a similar price as an average stock. Typical minimums for a syndication run between $50,000-$100,000. It’s not out of the ordinary for buy in to be as high as $250,000 or as low as $25,000.

Syndications

#1 Ownership

When investing in a syndication, you are a partner with the operators; therefore, you are also a legal owner of the asset.

#2 Tax Benefits

One of the largest benefits and differences between a syndication and REITs are the tax benefits received as an owner of the asset through depreciation. Through depreciation, you are able to write off the value of the asset over time. It is common that the depreciation offsets the cash flow you receive from the syndication, so little to no taxes are owed on the passive income. So even though you positively cash flow on a property, your gains will be zero or negative on paper. Whatever excessive paper losses you don’t use in one year are carried over to subsequent years.

(NOTE: As a passive investor, the depreciation and other passive losses can only offset passive income. It is possible to offset your W-2 income with the depreciation and passive losses, which will be the topic of a future post.)

For REITs you do indirectly take part in the depreciation but that is factored into the dividends you receive. There are no tax breaks and no offsetting of income. In addition, the dividends you receive are taxed as ordinary income.

#3 Returns

Returns for REITs can vary wildly due to the many different investable sectors available.

The National Association of Real Estate Investment Trusts, or Nareit, tracks each REIT sector's performance. This data only dates back to 1994, so there are 27 full years of performance to evaluate. With that in mind, here's the average total return of some of the most popular REIT sub-sectors over that time period.

REIT SUBSECTOR

TOTAL RETURN 1994-2020

ANNUALIZED TOTAL RETURN (AVERAGE RETURN)

Office REIT

1,118%

9.40%

Industrial REIT

1,649%

10.90%

Retail REIT

854%

8.30%

Residential REIT

1,740%

11.20%

Healthcare REIT

1,630%

10.90%

For common multifamily real estate syndications, when factoring in both cash flow and profits from the sale of the asset, investment returns typically offer upwards of 20% average annual returns.

If you were to invest in a real estate syndication with a hold period of five years and a 20% average annual return, you would essentially be making $20,000 per year for 5 years (or $100,000) on a $100,000 investment (this takes into account both cash flow and profits from the sale).

This means you will double your money, from $100,000 to $200,000, over the course of those five years.

WHICH ONE IS BETTER?

There is not a one-size-fits-all approach to investing in real estate. You can compare your personal investing goals and objectives with the pros and cons of investing in REITs and syndications described above.

It also does not need to be a zero sum game with REITs versus syndications. If you don’t have the minimum for a syndication, you can start with REITs then eventually transition into syndications. You could also do both in order to diversify your real estate investments.

The bottom line is the investment into real estate will provide great benefits no matter which one you choose.