Syndication Vs REIT: Understanding The Differences In Commercial Real Estate

by | Mar 30, 2020 | 0 comments

Decide REIT or syndication

Syndication vs REIT

There is no question that commercial real estate, specifically multifamily, is a stable investment with a great future outlook. Demand is increasing and supply is low, and the deliveries are not keeping up with demand. Many people focus on IRAs and 401ks, which are stocks or bonds, because that is what employers offer and, for the most part, what we were taught by our parents and grandparents. The main difference is that real estate is real, it is a physical asset that no matter what happens in the economy, will maintain a certain value and won’t vanish into thin air.

If you have considered investing commercial real estate, there are a couple ways to invest: syndications and REITs (real estate investment trusts). While they are both investments in real estate, there are many differences between the two in terms of flexibility, liquidity, tax treatment, and control. So, let’s check their differences.

What Are Syndications?

One of the main characteristics of syndications is that they are private placements and all offerings are restricted to personal relationships and because of that, the opportunity isn’t publicly advertised or traded.

One of the main advantages of syndications for commercial real estate is that they have fewer restrictions, and operators can make decisions based on what is best for the project as a whole. As an investor, you don’t have a limit on the number of syndications that you can invest in, and you can invest with different operators and in different markets.

One of the main drawbacks of syndications is that they are not liquid. Once you invest in a syndication, you are in the project until it is complete. Under rare circumstances, you may be able to work with the operator to arrange a swap or payout of some sort, but don’t count on it.

Some syndications have high investment minimums and their investors need to be accredited. This means that investors need to comply with certain net worth requirements and must meet a minimum income. At this time, there are still plenty of operators with opportunities for non-accredited investors with lower minimums, so this shouldn’t be a concern.

In terms of taxes, there is no question that syndications are far more attractive than REITs. They pass through losses that can then be used by investors to offset taxable gains.

Syndications offer higher growth potential and better tax benefits, but these come with a cost – you have to “know someone” to be invited to an opportunity, they are illiquid, and you may have to search a little harder to find an opportunity if you are non-accredited.

What Are REITs (Real Estate Investment Trusts)

Simply put, REITs are companies that invest in groups of properties that are professionally managed. These properties may include health care facilities, warehouses, apartments, and office buildings.

In what concerns REITs, there are mainly 3 varieties: mortgage, equity, and a mix of the two.

While you may get some tax benefits when investing in commercial real estate with REITs, managers must comply with some requirements. These means that the REIT will need to invest at least 75% of its total assets in real estate assets; it must derive at least 75% of gross income from rents or interest on mortgages; and, most important, it must pay dividends of at least 90% of its taxable income in the form of shareholder dividends. While REITs can pass income to shareholders without being taxed, shareholders will still pay taxes on the dividends as well as any capital gains.

One of the biggest benefits of REITs is that they are liquid. They are publicly traded on a major exchange just like any other stock.

One of the things that it’s important to keep in mind with REITs is that your gains could be higher in terms of passive income but not in terms of capital appreciation (equity), which is sometimes the most attractive part of a commercial purchase.

Bottom Line

When trying to decide between a syndication and REIT, each individual needs to look at what they are trying to accomplish. It is an individual decision based on your financial goals and comfort with the structure.

Are you still looking for the best way to attain to the level of financial freedom? There are quite a number of opportunities out there to choose from. But do you want to get there in the shortest amount of time with the least amount of hassle? If so, there is one in particular that you need to know more about.

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