What Are Some Differences Between Real Estate Syndication and REIT?

Do you want to invest in commercial property but just can’t find the time to do it? Or maybe you lack the knowledge required to manage such deals. Even then, you should not be discouraged from expanding your real estate portfolio and ensuring a steady income as an investor. 

Passive investing is the best option for people who want to invest in properties without a landlord’s responsibilities. There are various ways of investing in real estate passively, including syndications, real estate investment trusts (REITs), and crowdfunding platforms.

But what’s the difference between real estate syndication vs REIT? Although both give you the option of investing as a limited partner (LP), there are many differences between them. 

The main one is that while REITs allow you to purchase stocks of a company that buys properties, syndications enable you to become a joint partner in purchasing a property by contributing funds jointly. 

But that’s not the only difference. 

Means of ownership

As mentioned above, the primary difference between the two passive investment methods lies in the means of ownership. In REIT, you are not the property owner directly, regardless of what type it is. Instead, you own the stocks of the company that buys the property. 

In syndication, you become an LP in a limited liability company (LLC). Although the syndicator (the equity firm with whom you jointly buy a property) takes care of the maintenance issues of the property, you still enjoy the tax benefits and related advantages that come with direct ownership.

Less subject to fluctuations

Like all types of shares, the stock prices of REITs are prone to high fluctuations. They might vary from one month to the next in the share market, making them highly volatile and, therefore, risky for the shareholders. Even though they have high dividends, their risks deter many investors.

In contrast, privately held real estate is less prone to volatility. Because of the absence of liquidity, many investors are encouraged to invest in them passively. In passive investments, investors don’t have the option of exiting from a deal randomly, regardless of a significant macro or microeconomic event. 

Tax advantages

The income you receive from selling your REIT shares is subject to taxation unless you obtain a special concession. With syndications, you get to enjoy a variety of tax benefits. 

One of these is having the option to mention the full depreciation or paper loss. Paper loss, or unrealized loss, refers to a fall in a property’s price from its original price. However, no cash loss is involved since you haven’t sold the property.

If you are a direct property owner, it entitles you to a real estate professional status, qualifying you to apply your paper loss to your income and decreasing your tax liability. 

Minimum investment amount

The minimum investment amount is generally lower for REITs than syndications. To become a limited partner alongside an equity firm, you must invest between 25,000 USD and 100,000 USD, depending on the deal and the conditions attached. Most equity firms have a minimum amount of 50,000 USD.

These are some differences between real estate syndication vs. REIT that you should know before deciding to invest in either of these. Experienced investors prefer syndications because they allow you to take advantage of various tax benefits and expand your real estate portfolio.

Leave a Reply

Your email address will not be published. Required fields are marked *