REIT vs. Syndication: Which Investment is Right for You?

There are a plethora of ways to invest in real estate and each have their own advantages and disadvantages. In this article, I hope to be able to provide an unbiased comparison between two of those investment types.

What is a REIT?

A real estate investment trust, or REIT, is a company that owns and operates income-producing real estate properties. REITs are publicly traded on stock exchanges, which means anyone can buy shares in them. REITs pool money from investors to buy, manage, and sell properties, and they're required to distribute at least 90% of their taxable income to shareholders in the form of dividends.

What is a Multifamily Syndication?

A multifamily syndication, on the other hand, is a private real estate investment opportunity that pools money from a group of investors to purchase and operate a multifamily property, such as an apartment complex. Syndications are typically structured as limited liability companies (LLCs), and the investors are typically limited partners who receive a share of the profits and tax benefits. Syndications are not publicly traded, so they're not subject to the same regulations as REITs.

Real Estate Investment Trusts (REITs)

Pros:

• Diversification: REITs offer exposure to a diversified portfolio of real estate properties, which can help mitigate risk in the event one of those properties are underperforming.

• Liquidity: REITs are publicly traded, which means they're more liquid than other real estate investments, such as direct ownership of a property.

• Low investment minimums: REITs can be purchased on the stock exchange for as little as the cost of one share, making them accessible to a wide range of investors, including those with limited funds.

• Potential for dividend income: REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which can provide a steady stream of income.

Cons:

• Lack of control: As a shareholder in a REIT, you don't have direct ownership of the underlying properties and therefore have limited control over the management of the portfolio.

• Lower potential for returns: REITs typically offer lower returns than other real estate investments, such as direct ownership of a property or a syndication.

• Potential for market risk: REITs are still subject to market risk, and the performance of the portfolio can be impacted by factors outside of the investor's control. Meaning that REIT’s generally follow the trends of the stock market.

Multifamily Syndications

Pros:

• Direct ownership: With a syndication, investors have direct ownership of a portion of the underlying property, giving them more control over the investment.

• Higher potential for returns: Syndications can offer higher returns than other real estate investments, such as REITs, because they're focused on a single property or a small portfolio of properties.

• Tax benefits: Syndications offer tax benefits such as depreciation and deductions for expenses related to the property, which can help reduce your overall tax liability on the income your get from this investment.

• Ability to leverage expertise: Syndications are often led by experienced real estate professionals who have the expertise to identify and manage high-performing properties.

Cons:

• Higher investment minimums: Syndications typically require a much higher investment minimum than REITs, often in the tens or even hundreds of thousands of dollars, making them less accessible to investors with limited funds.

• Higher risk: Syndications come with higher risk because they're typically focused on a single property or a small portfolio of properties. If the property doesn't perform as expected, investors could lose a significant portion of their investment. This is mitigated by thorough due diligence on the sponsors, making sure the underwriting is conservative, they have a solid track record, they have adequate reserves, they’re acquiring deals in a growing market, and their asset management team has extensive experience implementing the business plan.

• Limited liquidity: Syndications are often structured as private investments, which means they're less liquid than publicly traded investments like REITs.

• Limited diversification: Because syndications are often focused on a single property or a small portfolio of properties, they offer less diversification than other real estate investments like REITs.