Real Estate Syndications vs. REITs for Investors

For investors seeking exposure to real estate, understanding the differences between real estate syndications and real estate investment trusts (REITs) is key. Real estate syndications involve pooling funds from multiple investors to purchase properties, offering direct ownership stakes. In contrast, REITs are companies that own, operate or finance income-generating real estate, allowing investors to buy shares and benefit from diversified portfolios. Both options have specific opportunities and risks, so investors should evaluate their goals and risk tolerance when choosing between real estate syndication vs. REIT investments.

If you need help choosing real estate investments for your portfolio, a financial advisor can work with you in creating a plan.

What Is a Real Estate Syndication?

A real estate syndication is a partnership between investors in which they pool their resources to invest in properties that are typically larger and more profitable than they could afford individually. This investment structure gives investors part ownership of a property or group of properties.

How Real Estate Syndications Work

In a typical syndication, there are two main roles: the sponsor (or syndicator) and the investors (or limited partners ). The sponsor is responsible for managing the investment, including finding, acquiring and overseeing the property. They also handle the day-to-day operations and make decisions about the property. Investors provide the capital needed to purchase and manage the property but are not involved in the operational aspects.

The process begins with the sponsor identifying a promising investment opportunity and presenting it to potential investors. These investors then decide whether or not they want to invest, and if so, they contribute capital in exchange for ownership shares in the property. Profits from the investment are typically distributed according to the shares each investor holds. This can include rental income , property appreciation and other revenue streams from the property.

Pros

• Investors don't have to find, acquire or manage the property.
• Investors can have ownership in high-quality real estate they couldn't otherwise afford on their own.
• Investors have more control over the properties they choose to invest in.
• Investors can benefit from tax deductions .

Cons

• Real estate syndications aren't as liquid as other investment types.
• You may have to be an accredited investor to take advantage of certain real estate syndication opportunities.
• Less diversification than REITs can lead to higher risk.

What Is a REIT?

A REIT is a company that owns, operates or finances income-generating real estate. Modeled after mutual funds, REITs provide investors with a way to earn a share of the income produced through commercial real estate ownership without having to buy, manage or finance any properties themselves.

How REITS Work

REITs can be publicly traded on major exchanges, offering high liquidity and making them accessible to individual investors. They typically focus on specific types of properties, such as shopping malls, office buildings, apartments and healthcare facilities. By law, REITs must distribute at least 90% of their taxable income to shareholders annually in the form of dividends, making them attractive for income-focused investors.

REITs are structured as either equity REITs, which own and manage properties, or mortgage REITs, which provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. Some REITs are a hybrid of the two.

Pros

• Investing in REITs offers diversification, since they often have low correlation with other asset classes like stocks and bonds.
• I nvestors can gain exposure to real estate markets without substantial capital or direct property management experience.
• REITs avoid double taxation ; income is only taxed at the shareholder level.
• Many REITs are publicly traded and therefore are relatively liquid investments.

Cons

• REITs can be sensitive to interest rate changes, economic conditions and changes in the real estate market.
• Investors have little or no control over the properties the REIT invests in.
• Investors don't benefit from deductions and depreciation like they would in a real estate syndication.

Key Differences Between Real Estate Syndications and REITs

Understanding the following key differences between real estate syndications and REITs can help investors make smart choices for their portfolio:

Investment Structure

Real estate syndications involve pooling funds from multiple investors to purchase a specific property or a portfolio of properties. Each investor owns a share of the property, and the syndication is typically managed by a sponsor or general partner who handles the operations. In contrast, REITs are companies that own, operate or finance income-generating real estate. Investors buy shares of the REIT, much like purchasing stock in a corporation, and become partial owners of the REIT’s real estate portfolio.

Accessibility and Liquidity

REITs are generally more accessible and liquid than real estate syndications. Publicly traded REITs are listed on major stock exchanges, allowing investors to buy and sell shares easily. This provides a level of liquidity comparable to other publicly traded stocks. On the other hand, real estate syndications often require a higher minimum investment and are typically illiquid. Investors must commit their capital for a set period, often five to seven years, until the property is sold.

Investment Risk and Control

Investors in real estate syndications often have more control over their investments since they can select specific properties or sponsors based on their preferences and risk tolerance . This can lead to higher potential returns but also higher risks, as the performance is tied to a specific property or group of properties. In contrast, REITs offer diversification across a larger portfolio of properties, which can help mitigate risk. However, individual investors have little to no control over the specific properties within the REIT’s portfolio.

Tax Implications

Tax treatment differs significantly between real estate syndications and REITs. Income from real estate syndications is typically passed directly to investors, who can benefit from depreciation and other deductions, potentially lowering their overall tax burden. REITs, however, are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which are taxed as ordinary income. This can result in a higher tax liability for investors compared to the potential tax advantages available through syndications.

Real Estate Syndication vs REIT: Which Is Right for You?

Choosing between real estate syndications and REITs depends on your investment goals , risk tolerance and desired involvement level.

• Investment goals : If you’re seeking passive income with liquidity, REITs may be more suitable. They offer a diversified portfolio of properties, trade on stock exchanges and provide regular dividends. On the other hand, real estate syndications typically aim for higher returns by investing in specific projects, often with a focus on value-add opportunities or developments.
• Risk tolerance : REITs generally offer lower risk due to their diversified nature and regulatory oversight. Syndications, however, may carry higher risk, as they involve investing in individual properties or developments, which can be more volatile.
• Involvement level : REITs are ideal for investors looking for a hands-off approach because they're managed by professional teams. In contrast, real estate syndications often require more involvement in the selection process and understanding of the specific project dynamics.

Bottom Line

Both REITs and real estate syndications provide a range of benefits for investors who want to add real estate to their portfolios. REITs provide diversified exposure, high liquidity and regular dividends. Real estate syndications, meanwhile, offer the potential for higher returns through direct ownership in specific properties but more involvement and higher risks. Evaluating your investment goals, risk tolerance, and desired involvement can help you choose between real estate syndications and REITs.

Tips for Investing in Real Estate

• Investing in real estate can be a smart way to diversify your portfolio. To get a better sense of how a real estate syndication or REIT may fit into your investment plans, you can talk with a financial advisor . Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Some real estate syndication opportunities may be limited to accredited investors, people or entities who have exclusive access to certain investments due to their high net worth, high income or by meeting specific professional criteria. Learn how to become an accredited investor .

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