The difference between a REIT and a Private RE Syndication?

4 Replies

I had a client ask me today what the difference was between a REIT and a private real estate syndication. We talked about it for a bit so I thought I would share some key thoughts with you guys!

REIT: REAL ESTATE INVESTMENT TRUST

A REIT (real estate investment trust) is a type of security with the purpose of investing in real estate through purchasing property or mortgages. Private REITs are funds or private real estate syndications but REITs are publicly traded.

Investors familiar with the stock market can think of REITs as related to mutual funds. They are usually traded on major stock exchanges, similar to other public companies. Subsequently, REITs provide a highly liquid way to invest in real estate; investors can simply buy and sell shares of the company on the stock exchange.

By purchasing shares of a REIT, investors are able to invest in real estate ventures through the company. The REIT will own, and often times operate commercial properties. REITs will often focus on one area of real estate — such as apartment complexes, properties in a certain region, hotels, shopping malls, timberland, office buildings, etc.


REAL ESTATE SYNDICATION

Real estate syndication is the process of pooling funds together from multiple investors to invest in real estate ventures.

Investors get access to specific real estate projects they otherwise wouldn’t have the opportunity to invest in. On a simplified level, investors are purchasing shares or equity in a real estate project. This can also be referred to as equity syndication.

Real estate syndication involves sponsors who manage the operations of the project and investors who provide the funding for the project. Sponsors are usually real estate investment companies who put together teams that are skilled in identifying real estate opportunities and managing the operations to return good profits to investors.

Investors are a crucial part of the process because they provide a bulk of the financing for the projects. The Internet and crowdfunding have both made networking between sponsors and investors much easier, making more real estate projects realistic opportunities.

Real estate syndications often take the form of a Limited Partnership (LP) or a Limited Liability Company (LLC). These business entities provide a liability shield for investors, so the capital at risk is limited to what they put into the project.

Once investors purchase their stake and the project is completely funded, the sponsor’s team gets to work acquiring the property and starting operations.

As an investor, which do you think is the smarter choice? 

A syndication. REITs are for mainstream investors.

If you have the money to be able to choose, then syndication will be a much more profitable option in most cases

The simple way that I put it that people seem to like:

With a REIT, you own shares of a company that owns many real estate assets VS with a syndication, you own a piece of a specific real estate asset.

I agree with @Todd Dexheimer , most of the time you'll find that returns from syndicated projects will exceed those from REITs. Of course the stipulation being that not all people have syndication opportunities at their disposal.

For Public REIT vs Syndication, definitely syndication. I prefer to invest in individual properties and projects, rather than funds. I agree with Robert Kiyosaki's position that REITs are basically stocks. I'm here for the cash flow.

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