Key Takeaways:
- Control: Investors in syndications have more influence over individual property investments compared to REITs, where control is in the hands of a management team.
- Returns: Syndications typically offer higher returns compared to REITs, especially for value-add properties, but also carry higher risks.
- Risk: REITs are generally considered lower-risk because they diversify across multiple properties, while syndications are more concentrated in specific properties.
Understanding Tertiary Real Estate Markets
Tertiary real estate markets refer to smaller cities and towns, often outside the major metropolitan hubs. These areas might not get the same attention as primary or secondary markets, but they offer excellent opportunities for investors willing to venture beyond the crowded city centers.
Tertiary markets are generally characterized by smaller populations, but they often experience steady growth, which leads to rising property values over time. For investors seeking long-term appreciation and passive income, these markets can be hidden gems waiting to be discovered. The unique dynamics in these regions, such as local economic development and demographic shifts, offer numerous opportunities for investors who are able to identify emerging trends.
What is Real Estate Syndication?
Investors in syndication deals often have more control over which specific properties they invest in, as they are usually presented with detailed deal information before making a decision. Additionally, syndications offer the potential for higher returns, especially for value-add properties, where the general partner renovates or improves the property to increase its value and generate higher rental income.
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs allow individuals to invest in large-scale, income-generating real estate without having to buy or manage the properties directly. REITs can be publicly traded on stock exchanges, offering a highly liquid investment option similar to buying shares of a company.
REIT investors have little to no control over which properties are included in the portfolio, as those decisions are made by the trust’s management team. However, REITs provide diversification because they often own a range of property types across multiple regions, reducing the risk associated with investing in a single asset.
Key Differences Between Real Estate Syndication and REITs
- Control:
- Syndication: Investors in syndications have more control over individual deals. You can choose which syndication to invest in, and you’ll often know details about the specific property or properties involved.
- REITs: When you invest in a REIT, you don’t choose the individual properties. Instead, you invest in the overall portfolio managed by the REIT’s leadership team.
- Returns:
- Syndication: Real estate syndication offers the potential for higher returns, particularly with value-add deals where properties are improved to increase their income and value. Returns are often shared between the general partners and limited partners, with limited partners receiving a preferred return before any profits are split.
- REITs: REITs generally offer steady, lower returns compared to syndications. Because REITs are diversified across many properties, they tend to be less volatile, and returns come primarily from dividends.
- Risk:
- Syndication: Investing in a real estate syndication can be riskier, as it often involves a single property or a small portfolio of properties. If the property underperforms or there’s a downturn in the local market, investors could see lower returns or even lose their investment.
- REITs: REITs are generally lower-risk because they diversify across many properties. This diversification spreads the risk, making them more stable than syndications, especially for investors looking for less exposure to market fluctuations.
- Liquidity:
- Syndication: Real estate syndication is a long-term, illiquid investment. You typically commit capital for several years (usually 5-7), and there’s little flexibility to withdraw your money before the property is sold or refinanced.
- REITs: REITs, especially publicly traded ones, offer liquidity similar to stocks. You can buy and sell shares of a REIT on the stock market, making it a much more flexible investment.
- Tax Benefits:
- Syndication: Investors in syndications can take advantage of tax benefits like depreciation and cost segregation, which can reduce taxable income. In many cases, investors can defer capital gains taxes through a 1031 exchange.
- REITs: While REITs do offer dividends, which are taxed as ordinary income, they don’t provide the same level of tax advantages as direct ownership in syndication.
Which is Right for You?
Choosing between real estate syndication and REITs depends on your financial goals, risk tolerance, and level of desired involvement. Syndications may be more appealing if you’re looking for higher returns, more control, and are comfortable with the illiquid, long-term nature of the investment. REITs are a better choice for those seeking a passive, more liquid investment with lower risk and consistent dividends.