Syndications Vs REITs
Real Estate Investment Trusts, commonly known as REITs, are investment vehicles that own, operate, and finance income-generating properties such as apartment buildings, office buildings, hotels, and shopping centers.
Similar to private syndication, REITs allow investors to invest in real estate without having to buy, manage or finance property themselves. REITs issue shares of their company that are publicly traded, and investors can buy and sell these shares just like stocks.
REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. REITs can be classified into several categories, including Equity REITs, Mortgage REITs, and Hybrid REITs. Equity REITs own and operate income-generating properties, while Mortgage REITs invest in mortgages and mortgage-backed securities. Hybrid REITs invest in both property and mortgages.
Benefits of Investing in REITs
Diversification: One of the main benefits of investing in REITs is that it provides investors with exposure to a diversified portfolio of properties. By investing in REITs, investors can access a broad range of real estate properties that they may not have been able to invest in otherwise.
Liquidity: REITs are publicly traded, which means they can be bought and sold on a stock exchange just like other stocks. This makes REITs a more liquid investment compared to direct real estate investments, which can be challenging to sell.
Drawbacks of Investing in REITs
Market Risk: Like other stocks, REITs are also subject to market risk. Their share prices can be impacted by broader market trends and movements.
Taxation: REIT dividends are taxed as ordinary income, which can result in a higher tax burden for some investors.
Compared to Private Syndications
While REITs may offer some benefits, I believe that the benefits of private real estate syndications far outweigh those of REITs.
One of the main advantages of private real estate syndications compared to REITs is the potential for higher returns. Because investors have more control over the investment, they can make strategic decisions that can lead to higher returns. Additionally, private real estate syndications can provide investors with tax benefits, such as depreciation deductions and the ability to defer taxes through a 1031 exchange.
Private real estate syndications also offer investors the opportunity to invest in specific properties that align with their investment goals and risk tolerance. This level of customization is not available with REITs, which invest in a broad range of properties that may not align with an individual investor's goals.