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Differences between a REIT, Real Estate Syndication and Real Estate Fund
Real estate investing has long been seen as a smart way to diversify a portfolio and generate steady returns. While there are a variety of ways to invest in real estate, three popular options are real estate investment trusts (REITs), real estate syndications, and real estate funds. Although these investment options involve investing in real estate, they differ in various aspects. This article aims to provide an in-depth understanding of the differences between REITs, real estate syndications, and real estate funds.
Let’s dive in, shall we?
Real estate investing is a popular option among investors as it provides an opportunity to generate steady income, diversify one’s investment portfolio, and hedge against inflation. The real estate market offers different investment options, including real estate investment trusts (REITs), real estate syndications, and real estate funds. Although these investment options involve investing in real estate, they differ in several aspects, including legal structure, ownership structure, investment size, liquidity, investment returns, management, and control. In this article we explore the differences between the three: REITs, real estate syndications, and real estate funds.
1. REITs
REIT stands for Real Estate Investment Trust. A REIT is a publicly-traded company that invests in real estate and generates income from the rent or sale of properties. REITs are required to distribute at least 90% of their taxable income to their shareholders as dividends. REITs are regulated by the Securities and Exchange Commission (SEC) and are required to comply with specific rules and regulations.
REITs can invest in different types of properties, including office buildings, shopping centers, apartments, hotels, and warehouses. REITs can be traded on major stock exchanges, making them a highly liquid investment option. REITs offer investors the opportunity to invest in real estate without the hassle of property ownership.
2. Real Estate Syndication
Real estate syndication involves pooling money from multiple investors to purchase and operate a real estate property or properties. The investors in a real estate syndication are passive investors and do not participate in the day-to-day management of the property. The sponsor or the syndicator manages the property and makes decisions related to the property's operation.
Real estate syndication can be structured as a limited partnership or a limited liability company (LLC). The investors in a real estate syndication are typically accredited investors with high net worth or income. Real estate syndications are not publicly traded, making them less liquid than REITs. Additionally, syndications have the opportunity to offer passive investors a steady stream of cash flow in the form of monthly or quarterly distributions and/or long term capital gains upon exit, which typically occurs within five years.
3. Real Estate Fund
A real estate fund is a type of investment fund that focuses on investing in properties or real estate-related assets such as mortgages, loans, or other securities backed by real estate. Real estate funds typically pool money from multiple investors and use it to purchase properties or assets, with the goal of generating income and appreciation over time.
One of the key characteristics of real estate funds is their diversification, which can help reduce investment risk. Real estate funds can invest in different types of properties such as commercial or residential, as well as in different geographic locations or real estate sectors. This diversification can help minimize the impact of any single property or market downturn on the overall fund performance.
Another characteristic of real estate funds is their ability to generate steady income through rent or other sources. This can make real estate funds attractive to investors looking for a stable source of passive income.
Overall, real estate funds can provide investors with exposure to the real estate market, diversification, steady income, and potential for long-term appreciation.
Differences between REITs, Real Estate Syndication, and Real Estate Fund
While REITs, real estate syndications, and real estate funds all involve investing in real estate, they differ in several aspects, including:
Legal Structure
REITs are structured as corporations and are required to comply with specific regulations. Real estate syndications and real estate funds can be structured as limited partnerships or LLCs.
Ownership Structure
A REIT is a company that owns/finances income-producing properties, paying shareholders dividends based on rental income. With a real estate syndication or real estate fund, investors own equity in the property/asset.
Investment Size
REITs allow investors to purchase shares in the company, which can range from a few dollars to thousands of dollars. Real estate syndication and real estate funds typically require a minimum investment of tens or hundreds of thousands of dollars.
Liquidity
REITs are highly liquid and can be traded on major stock exchanges. Real estate syndications are not liquid as the investment typically needs to remain held until the sponsor team decides to exit the deal. Real estate funds can be semi-liquid investments depending on the sponsor’s terms and whether they allow investors to withdraw capital after a certain timeframe. Real estate syndications and funds do offer monthly or quarterly cash flow distributions throughout the hold period of the investments.
Investment Returns
REITs generate income from rental income and property appreciation and are required to distribute at least 90% of their taxable income as dividends. Real estate syndications and real estate funds generate income from rental income and property appreciation, but have more flexibility with cash flow distributions.
Management
REITs are managed by a board of directors and executive management team. Real estate syndications and real estate funds are managed by a sponsor team or general partner team.
Tax Implications
REITs are paid out to investors as dividends, therefore subject to capital gains tax. Investors in real estate syndications and real estate funds are typically paid out as passive income and are considered capital gains. Investors in real estate syndications and real estate funds also have the ability to write off passive losses, aka paper losses, gained from depreciation. Investors in real estate syndications sometimes have the option to 1031 Exchange their equity into a new property, reducing the tax liability upon the sale of the asset.
Pros and Cons of REITs, Real Estate Syndication, and Real Estate Fund
While REITs, real estate syndication, and real estate funds all have their advantages and disadvantages, the choice of investment option depends on the investor's goals, risk tolerance, and investment strategy.
REITs
Pros:
High liquidity
Low minimum investment
Diversified portfolio of properties
Regular income from dividends
Cons:
Limited tax benefits
Performance can be correlated to the stock market
Blind investment
Real Estate Syndication
Pros:
Direct ownership in the underlying property
Cash flow
Tax benefits
Less correlated to stock market
Cons:
Less liquidity
High minimum investment
Real Estate Fund
Pros:
Diversified portfolio of properties
Cash flow
Tax benefits
Less correlated to stock market
Cons:
Less liquidity
High minimum investment
Semi-blind investment
Investing in real estate can be a lucrative option for investors looking to diversify their portfolio. REITs, real estate syndication, and real estate funds are popular investment options, each with its own advantages and disadvantages. Investors must evaluate their investment goals, risk tolerance, and investment strategy before choosing an investment option
FAQs
What is a REIT?
A REIT is a publicly-traded company that invests in real estate and generates income from the rent or sale of properties. Investors buy shares of the publicly-traded company.
What is real estate syndication?
Real estate syndication is a partnership between investors and a sponsor or general partner to purchase and manage a real estate property. The investors pool their money together to purchase a property, and the sponsor or general partner manages the property. Investors receive monthly or quarterly cash flow distributions as well as a lump sum payout upon a capital event at the end of the investment term.
What is a real estate fund?
A real estate fund is a pool of capital from multiple investors that is used to invest in real estate properties. The fund is managed by a professional management team, and investors receive income generated by the properties. Similar to a real estate syndication, investors can receive monthly or quarterly cash flow distributions as well as a lump sum payout upon the exit of the deal (i.e. the general partnership sells the asset or refinances).
What is the minimum investment for real estate syndication and real estate funds?
Real estate syndication and real estate funds typically require a minimum investment of tens or hundreds of thousands of dollars. In our experience, we typically see minimums set at $25,000-$50,000.
Are the returns on real estate syndication and real estate funds guaranteed?
No, the returns on real estate syndication and real estate funds are not guaranteed. The returns are dependent on the performance of the underlying property and market conditions.
Investing in real estate can be a complex and nuanced process, and choosing between REITs, real estate syndication, and real estate funds requires careful consideration of the investor's goals and risk tolerance. By understanding the differences between these investment options, investors can make informed decisions to diversify their portfolios and potentially achieve higher returns.
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