Consider having a diverse portfolio when considering developing a real estate investment portfolio. Participating in real estate syndication is recommended when an investor desires to invest in bigger and better properties but lacks the necessary capital or experience. It is better to learn about such syndication to understand real estate syndication vs REIT.
REIT (Real Estate Investment Trust) is an organization that owns, operates, and also finances income-producing real estate assets. Inspired by mutual funds, the capital of several investors is pooled by REITs. On the other hand, such syndication helps investors to put their resources into the best reliable properties.
What is Meant by Real Estate Syndication?
It’s a path for investors to pool their financial resources in estate properties and projects that are much bigger to be afforded by a single investor. Not only do investors invest collectively in a property under this syndication, but they also work together to manage the same property as it will be held as a rental. It is another way of indicating a ‘real estate partnership.’
What is REIT?
Real estate investment trusts are organizations established solely for managing, financing, or owning properties that generate income. Its structure is based on mutual funds, giving investors a very liquid option to own estates.
Structure of the Syndication Deal
In this deal, a limited liability company or partnership is often formed by investors and syndicators, where the investors are the limited partners, and the syndicator is the managing member.
Every partner in such a deal owns a certain percentage of the property. Sometimes investors own an equal share in the particular property, and other times the larger share of equity is taken by the syndicator. Also, any cash flow arising from the property- such as rents or sales- must be shared amongst partners.
When talking about real estate syndication vs. REIT, it is in the syndication that investors gain direct ownership by being a limited partner in the LLC (Limited Liability Company).
Structure of REIT
For prospective investors, it offers a variety of benefits. First, it provides a steady income stream and lessened portfolio volatility, dividends, and wealth creation. Being a listed corporation, it buys and sells, resulting in excellent liquidity. Finally, since returns frequently surpass Consumer Price Inflation, it is a natural inflation hedge.
Equity and mortgage REITs are the two main categories. These are very advantageous for the growth of an economy since they enable the channeling of idle investable assets into infrastructure projects like housing developments, hospitals, schools, and the like.
Pros of Real Estate Syndications
It can be beneficial for both- investors and syndicators. Some pros are mentioned below:
- Passive income or returns: The passive investors can earn monthly or quarterly passive income or return from their investment, and that too without managing the property.
- Cost-effective for syndicators: An indicator can benefit from a special deal without investing their own money.
- More significant assets: It allows a group of investors to pool their resources and buy more significant properties that they could not have purchased individually.
- Diversification: The investors’ capital can spread across multiple syndications.
- Control: Unlike crowdfunding or investment trust platforms, such syndications allow the investors to choose the specific properties they want to invest in.
Pros of REIT
This could have higher dividend yields than some other investments.
Dividends must account for at least 90% of REITs’ taxable revenue, which must be distributed yearly to shareholders. Traditionally far more significant than other equities, the industry’s dividend yields have provided a continuous source of income in various market circumstances.
An investment in this offers various advantages not found in other companies besides the historical performance and diversification benefits already mentioned. These trusts have grown in popularity among investors over the last few decades partly because of these advantages.
The business strategy for most trusts is simple and easy to understand: the company earns income and gives it out to shareholders through dividends. A public company’s financial results must be presented by generally accepted accounting principles (GAAP). REITs are no exception (GAAP).
Conclusion
Before investing in property syndications, an investor must meet specific eligibility requirements. For example, only an accredited or sophisticated investor can invest in such deals. Also, connect with trustworthy partners and choose your best role when investing.