What Is Syndicated Real Estate And Its Advantages Over REIT?
Are you, like most people, interested in investing in real estate but are daunted by the thought of managing the property? Investing in real estate is profitable on all counts, but only some have the time, expertise, or knowledge required.
The most feasible option for such people is syndicated real estate. It is a passive investment method in which you buy a property jointly with an equity firm (which plays the role of the syndicator) but without having the responsibilities attached to it, like those of maintenance and upkeep.
Syndication is a highly favored preferred investment option among investors. Statistics show that in 2021, it attracted more than 300,000 investors. While the return on these was between 5 to 10%, the average value of a property was around 3 million USD.
But syndication is one of many kinds of passive investment. The other is a real estate investment trust or REIT, in which companies have complete property ownership but allow investors to buy stocks and earn dividends.
What should you know about these two investing techniques, and in which ways do they differ from each other? Continue reading to find out.
Real estate syndication
How does it work?
Property syndication occurs when two parties contribute funds together to purchase a property. Several players are involved in a deal of this type, including the passive investor (you), syndicator (usually an equity firm), attorneys, real estate brokers, lenders, and certified public accountants.
What is the investment amount?
The investment amount might vary from one deal to another. In most cases, the syndicator and passive investor contribute between 25% to 30% of the total property’s worth, while the lender or bank pools between 70% to 75% of the amount.
Types of properties available
An experienced equity firm purchases exclusively multifamily Class B and Class C properties because the potential for returns is high. These properties have an increased cash flow, low-vacancy rate, and house middle-income tenants.
What are the investing requirements?
The Security and Exchange Commission has classified passive investors into three categories: accredited, sophisticated, and non-accredited. The classification you fall in will determine the investment opportunities available.
You can invest in multifamily syndication in plenty of ways, including using cash, self-directed IRA, solo 401 k, qualified retirement plan, and a combination of several accounts. Many investors prefer the self-directed IRA option because it allows them to put their money into alternative investments through traditional and Roth IRAs.
REIT is a passive investment method that has been around since the 1960s. As mentioned above, it allows investors to own stocks without having direct ownership of the property.
REITs are of two types: equity and mortgage. Equity REIT refers to companies that own properties like shopping centers and apartment buildings and spend a certain amount in maintaining them. After deducting the maintenance amount, these companies pay the remaining amount raised as rentals among the shareholders.
Which of these should you consider?
Although REITs have some benefits, they are far lesser when compared to syndication. For example, since syndication lets you have direct ownership, it gives you various tax advantages, including depreciation.
Although stocks have high dividend returns, they are vulnerable to market fluctuations. In contrast, passive real estate investing enjoys the element of illiquidity. It is minimally affected by price volatility. Low liquidity ensures the stability of a property’s value since investors cannot pull out of a deal randomly.
You should try exploring syndicated real estate as a passive investment option simply because of its numerous benefits. It enables you to enjoy a steady income and various tax benefits and expand your real estate portfolio.