Real estate opportunities not requiring you to locate and purchase property generally boil down to either REITS or syndications. Both are passive investments, offering partial property ownership, typically outside an individual’s budget. The sponsor of the syndication or the fund manager of the REIT source opportunities, completes due diligence, manages the asset, and decides when to exit.
How Real Estate Syndications Work
Syndications combine resources with other investors to purchase commercial assets. The syndicate establishes a business partnership between the sponsor, who acts as the managing partner, and a group of investors, who become limited partners and provide the capital needed to close the deal.
The sponsor sources a deal and then provides potential investors with projections based on the market, financials, and capital projects that could drive appreciation. Individuals then decide how much to invest. The sponsor manages the property and provides investors with quarterly reports and distributions based on profits.
How REITs Work
REITs, or real estate investment trusts, are one of the few ways to invest in real estate without owning individual assets. These funds pool real estate assets that trade on the stock market. Just as mutual funds specialize, REITs can focus on certain market segments, allowing you to hold different funds for better diversification.
Central Differences Between REITs and Syndications
REITs do not give you control over the type of properties included in the fund. You choose your investment based on the parameters of the prospectus and the fund manager’s expertise but have zero control over which assets are held within the fund.
Syndications involve buying a single property so you can both the asset and the sponsor. Diversification can include owning property in different markets, buying various asset types, and working with multiple syndicates.
Both REITs and syndications can provide regular cash flow to investors.
The law requires REITs to distribute at least 90% of taxable profits to shareholders. Most stock and mutual fund holdings do not have mandatory dividend payouts.
Syndications typically provide regular distributions.
REITs are subject to market prices and the same market forces as stocks and can lose value quickly when the market turns.
Syndications hold real property and tend to have less market volatility. It can also have less downside risk because you own land and buildings instead of certificates of ownership.
Real estate as an asset tends to be illiquid. However, REITs are securitized, allowing you to buy and sell anytime. Syndications require you to maintain ownership until the sponsor sells or refinances the property.
Barriers to entry often limit property ownership. You need large amounts of capital and the ability to secure financing for each deal. REITs and syndications overcome these challenges by eliminating the financing requirement and reducing investment minimums.
REITs are publicly traded companies. They are available to all investors and have low investment minimums. Sponsors of real estate syndications may only permit accredited investors and typically require investments of $50,000 or more. (McKee Capital accepts a limited number of non-accredited investors on our deals.)
REITs are a good way to access real estate if you cannot meet the investment minimums of a syndication. They are more liquid but also more volatile in a declining market. On the other hand, real estate syndications give you more control over asset ownership yet include the passive feature, often giving you market rate returns at lower risk.
If you’re interested in learning more about investing in real estate syndications with McKee Capital Group, watch our introductory video.