The Considerable Differences Between Real Estate Syndication And REIT

Citizens in Austin are spoilt for choice when it comes to investing in real estate. If one is thinking of being a landlord and enjoying the title, others are considering investing in real estate funds. Thanks to a booming market of Commercial Real Estate in Austin, the cash inflow is seeing a rise.

However, the sudden spike in interest is also a potential red flag for new investors. With a lack of knowledge, they are prone to make bad decisions and investments. Some of them give in to the buzz in the market and invest with little to no knowledge. Also, there is another lot that waits for the right time and fails to leverage the market uproar.

For all confused to-be investors, this articulation is a savior. To start with the basics, here are two terms — REIT and Real-estate syndication.

REIT – Real Estate Investment Trusts

There are commercial property management companies and others who particularly invest in real estate. And what do you do? You invest in these companies to leverage their knowledge and experience.

These companies pool money from several individual investors like you and invest in profitable ventures.

Real-estate syndication

Here, a group of investors joins hands to invest in a single or multiple properties. It is a combined investment made by a bunch of investors through an LLC (limited liability company).

This involves substantial research and resources as it provides you direct ownership. To invest in a property which could not be afforded individually, real estate syndication is the way.

Now, we have two ways for you to start your investment journey in real estate. Which suits you? is a question that deserves more thought.

Though consulting with a real estate asset management firm is ideal, there is another way out.

And it is to understand the differences between REIT and Real-estate syndication.

  • Resources

REIT is a specialized company that invests in real estate. Investing in it does not require many resources other than finding a credible REIT.

Professionals conduct research, negotiate, and monitor the investments on your behalf. With REIT, you are a truly passive investor with little to no control. 

On the other hand, with real-estate syndication, skills and resources are at play. Alongside investing your capital, you must also engage in gaining direct knowledge of the market. Then, combine your efforts with the other investors to find the deal. Forming an LLC or a limited partnership is a common sight for these kinds of syndication.

Now, what do you prefer — Complete passive investing or more hands-on investing? Answer this and you start your investment journey in real estate.

  • Risk

Investments come with risk and here, REIT and real-estate syndication come with diverse risks.

REIT investments are more vulnerable to macro factors like economic policies, politics, and others. Every rule of law has its impact on your REIT investments. When the market value of your holdings drops, you do not have direct equity to leverage. 

Real-estate syndicates are prone to risk but are controllable. How?

Here, assets and properties to invest in are in your hands. You decide collectively to invest or not. Hence, the profitability of the investments is directly proportional to your research and negotiation.

However, even if the market collapses, you own sufficient direct equity to soften your losses.

Risks are not negotiable, but you can decide your risk appetite. Though REITs may sound riskier, remember they are managed by professionals. And they assess the health of the market better than us. 

With syndication, it is all in your hands. From performing due diligence to negotiating, you hold the authority. Also for syndications, there are professionals known as syndicators. These professionals procure information, scout, and manage properties.

  • Returns

REITs have provided returns on a rate i.e tad higher than the real estate stocks for the past 40 years. Though the difference is little, REITs are more profitable than direct investing too. 

However, REITs are known to provide poor cash flows to their investors. The poor cash flows are because most of the REITs offer substantial dividends for investors.

On the flip side, real-estate syndication provides for better cash flows in the long run. Since investors own direct equity in the properties, capital returns are plausible too. And considering syndication requires more capital than REITs, the returns are also proportionately higher.

REITs have outperformed stocks and other markets by a slight margin. But, at an opportunity cost of poor cash flow and lack of ownership. If you can invest only a few thousand dollars, REITs are a viable proposition.

Real-estate syndication requires more individual investment from you while giving substantial returns. Considering the equity backing and better cash flow, syndication might suit you better.

  • Ownership

When you invest in REITs, you only own the stocks of the real estate asset management company. This does not carry over to owning any part of the real estate. The lack of control and equity may be a concern for investors who prefer to be more hands-on.

With syndication, you and your co-investors own the property collectively. The extent of ownership is in direct correlation with the volume of your investment. The direct ownership of properties provides more flexibility to individual investors.

  • Tax benefits

The only factor where real-estate syndication overwhelms REITs. 

REITs are notoriously known to be less transparent with their fees and earnings payouts. Though they perform better, investors tend to lose trust due to the lack of transparency.

They distribute the net income and not the earnings from commercial properties. Also, REIT dividends are not tax-deductible.

Nevertheless, syndications distribute earnings before the assets’ depreciation is calculated. This allows for investors to claim asset depreciation and reduce tax burdens.

Final thoughts

Understand all the factors and evaluate the amount of time and effort you can invest. This will outweigh the importance of the capital you are investing.Both REITs and real-estate syndication are viable propositions and it boils down to your individual preference. For professional guidance related to investment in commercial real estate in Austin contact the most trusted Texas real estate firm GW Partners.