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The US real estate market is a multi-trillion dollar industry with immense investment opportunities. We can imagine that similar cases exist in many other places globally, as land value appreciates exponentially.
Expectedly, there’s a high organization level for investors looking to get into real estate. Several aspects, such as mortgage lending rates, lease, and rental agreements, contribute to the potential and investment returns you’d hope to get.
Also, real estate investments are active income generators, as you’d have to oversee the assets in your portfolio. For instance, landlords and property owners have to handle repairs and maintenance on their tenancy property.
We’d imagine that not everyone likes the “active” approach to real estate investments and would settle for options less demanding. If you fall into this category, you can go for a REIT investment or a real estate syndication.
However, which of the passive real estate investment strategies is suitable for your use case? You can contact a real estate agent for an explained differences between real estate syndication and REIT. They can also share with you the numerous similarities between both investment types.
This piece aims to give you a broad overview of real estate syndication vs REIT: differences. It could give you the right idea on both concepts and allow you to make the correct decision on them.
Real Estate Syndication vs REIT: Differences in the Real World
A REIT (Real Estate Investment Trust) company takes money from multiple investors and uses the funds to invest in discrete real estate units. While the working theory is that a REIT helps you invest in real estate assets on your behalf, the conditions are slightly different in practice.
On the other hand, real estate syndication is a partnership agreement between investors to manage real estate property. In such an arrangement, you’d invest more than actual funds, as you’d get delegated responsibilities that require some skill levels.
Below are the real estate syndication vs REIT: differences. We’d highlight the unique ways each of them handles concepts like asset ownership and taxation:
Asset Classes
Several asset classes can exist in an investment portfolio at any point. They could include residential property, single or multifamily rental apartments.
How REIT Handles Asset Classes
As we mentioned earlier, REIT companies theoretically invest in the real estate market for you. In reality, you’re investing in a REIT stock instead of the natural assets. It means that you only get a stake in the investment portfolio of the REIT you chose.
The trust retains the full autonomy on the asset type in which they’d invest. For instance, a REIT company’s asset class may include shopping malls, office buildings, and so on. In turn, your investment funds get spread across the markets, and you don’t get to choose what apartment in which you specifically want to invest.
The apparent advantage of the approach is that your investment portfolio enjoys better diversification as you get stuck in a single asset market.
How Real Estate Syndication Handles Asset Classes
In contrast, the real estate syndication structure allows you to choose the asset classes in which you wish to invest. Typically, the syndication picks out single apartments on your behalf, and you have a closer connection with your selection.
The upside is that you get deeper insights into your asset classes, like their financials and unit sizes.
Investment Access
Real estate investments are available to prospective investors in various ways. It could be public, private, or a combination of both.
How REIT Handles Investment Access
REIT companies sell their stocks to investors and list their offerings on public stock exchanges. As a result, investment access is free for anyone willing to pay the unit price. If you’re looking to get into a REIT portfolio, you could use mutual funds or ETFs (Exchange Traded Funds) like other stock listings.
Another interesting REIT feature is that investors can buy stock units as low as $100. That makes it more accessible to more people, especially the ones looking to get into real estate investment for the first time.
How Real Estate Syndication Handles Investment Access
Syndications are a departure from quick and easy investment access. You’d have to spend some time and resources to get access to a real estate syndication investment portfolio. A significant reason for that is the SEC (Securities and Exchange Commission) regulations syndication companies have to follow.
The regulatory commission prohibits real estate syndications from advertising their investment offers. Therefore, investors can only access an asset class by word of mouth and referrals. Beyond that, asset acquisition is a drawn-out process that could take months and cost lots of money.
Some real estate syndications specify that only accredited investors can access their offers. That puts an added step to the entire process of getting your funds into a real estate syndication.
The Better Alternative
Considering the differences between REIT and real estate syndication, which of them is the best for you? The answer is not objective, as other variables exist to influence your decision.
However, you could notice that both real estate investment types are complementary: the advantage of one makes up for the pitfall of the other. As such, it’s best to consider your specific investment needs.
If you need a quick, low-cost real-estate investment plan, REITs are much more suitable. However, you’d have to make do with minimal control on assets and lower tax returns in some cases.
Syndications are a better alternative if you have more funds and have found an existing investor ready to give you a deal. Bear in mind that real estate syndication risks are lower than with REITs.
Final Thoughts
With so many real estate investment options from which to choose, REITs and syndications allow you to get returns on investments passively. However, you must understand how they handle crucial concepts, as we’ve explained above.
Understanding the pros and cons of real estate syndication and REIT alternatives gives you the correct insight to make the most effective investment decision.
You may also like: 5 Tips for the Real Estate Investor
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