What’s the difference between a REIT and Private Real Estate Syndication?

If you’re an investor looking at various real estate investments, you’ve probably come across terms like REIT or a Private Real Estate Syndicate. Both are vehicles to invest in real estate.

However, there are some key differences between a REIT and a Private Real Estate Syndication that are important for investors to understand.

Depending on the type of investment they are looking for, real estate investors might opt for one or the other.

Let’s examine the key attributes of a REIT and a Real Estate Syndication to determine the benefits and disadvantages of each.

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.

Key Attributes

  • Shareholders: REITs are required to have a minimum of 100 shareholders.

    No five investors can hold a majority share of the company between them.

  • Assets & Income: REITs are required to have a minimum of 75 percent of their assets invested in real estate, cash, or U.S. Treasuries.

    Further, at least 75 percent of gross income must come from real estate investments.

  • Dividends: This is a major reason investors are fond of REITs.

    The law requires them to payout at minimum 90 percent of gross income as a dividend to investors.

    Consequently, REITs receive tax considerations and are able to deduct the dividends to avoid the harsh tax liability. 

Types of REITs

  • Equity REITs: Most REITs take the form of equity REITs.

    These types of REITs purchase and own real property.

    Their revenue comes from leasing the property space to tenants.

    Rent is counted as income and distributed to shareholders as the dividend.

    The more valuable the property, the more rent the REIT can charge, the more dividend paid out to investors.

    When REITs sell property, the capital appreciation and proceeds from the sale are also reflected in the dividends.

  • Mortgage REITs: Less common than equity REITs, mortgage REITs purchase and own property mortgages.

    They might back the loan for mortgages on behalf of property owners.

    But another way is buying existing mortgages in the form of mortgage-backed securities.

    In this case, the revenue comes from the interest spread between their mortgage loans and the cost of providing the loan; this makes them sensitive to changes in interest rates.

    Mortgage REITs use a higher equity to debt ratio, making them less leveraged relative to other commercial mortgage lenders.

  • Hybrid REITs: Hybrid REITs are just that, a hybrid of the two previous types.

    They purchase and own both real properties and mortgages.

Investing in REITs

Again, investors can often find REITs listed on a stock exchange and purchase shares.

Others might not be listed on an exchange and/or are private.

Some REITs will focus on a niche area in the real estate market, or a specific state or region.

This allows investors to pick the type of real estate investments they want to put their capital into.

There are also REIT ETFs available for investors.

Using ETFs can help investors get exposure to a diversified bundle of real estate investments, and not be dependent on the success of one region or industry.

Dividend reinvestment plans (DRIPs) allow investors to take the dividend payouts and reinvest them to purchase more shares of the company.

Investors commonly use this with REITs to further compound their investments over time.

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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.

Key Attributes

  • Investors: Investors who are accredited are able to invest in real estate syndications.

    The average total investor commitment for a syndication is between 80-95 percent.

    They hold a majority of the equity stake in the project.

  • Projects: The average size of a private real estate syndication is $2.3 million.

    The projects are structured to allow investors to hold a larger portion of the equity.

  • Returns: Investors get paid out returns from the project called preferred returns.

    These payments can be annual or quarterly, and the average annual preferred return is 8 percent of the project’s revenue.

    The remaining returns come from the capital appreciation of the property once the project is finished.

Types of Real Estate Syndication

There are a few common types of syndicated equity offerings:

  • Specific Offering: This is the most common type of offering for equity syndications.

    The sponsor identifies a specific opportunity including one or more real estate assets.

    They raise the required capital from accredited investors.

    Investors are able to analyze the investment potential of each offering or property before they choose to invest.

  • Semi-Specific Offering: The sponsor identifies a variety of properties and investment opportunities.

    They present the business plan to investors to raise capital to acquire similar properties that offer similar returns.

    With these types of offerings, sponsors are able to raise larger amounts of funding while investors achieve more diversification in their real estate investments.

  • Blind Pools: The sponsor starts with presenting the proposed business plan to investors.

    No specific properties or projects are identified, but the process of finding future opportunities is explained.

    Investors are buying into the vision, experience, and expertise of the sponsor.

    Sponsors that raise capital through a blind pool usually have a history of successful projects through specific or semi-specific offerings.

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Investing in Syndications

Investing in a real estate syndication often means you will be working with a real estate investment company.

Investment companies will put in the leg work to assemble a team and pool the capital necessary to make a successful project possible.

When you are analyzing potential investment companies, you want to look for management teams with a combination of experience, credibility and transparency.

  • Experience: The sponsor’s team should have a strong track record of acquiring, managing and successfully completing similar real estate projects.

  • Credibility: The sponsor’s team members should have solid reputations for integrity and success within the real estate community.

  • Transparency: The sponsor should be transparent about the process, even as things don’t go as planned. There should be consistent communication about how they are maximizing value for investors.

After locating a management team built for success, you should always evaluate the real estate project yourself and assess where it falls on your personal barometer for risk tolerance.

Key Takeaways

  • Both REITs and Real Estate Syndications are mechanisms for investors to put capital into real estate assets

  • They both offer investors exposure to the real estate market and help diversify an investment porfolio

Real Estate Investment Trusts:

  • REITs are listed on the stock exchange and can expect a healthy dividend and liquid market - however share prices relfect a struggling economy
  • REITs can focus on one primary market niche OR they can be bundled together in ETFs for a diversified approach

Real Estate Syndications:

  • Real Estate Syndications offer investors a direct approach to invest in real estate

  • Investors own property and receive healthy returns while a management team handles the day to day operstions

  • Syndication gives investors the opportunity to invest in specfic projects and properties they can analyze and determine a specific profit potential

Each of these opportunities are strong investment opportunities, but as a smart investor it's important to weigh the intricacies of each and determine which type of investment is right for you. 

Topics: real estate investing, real estate syndication, private equity