Many investors aren’t exactly sure what the differences are between real estate syndications and REITs.
This article gives a good overview along with the tax implications for both types of investments.
What are real estate syndications?
Real estate syndications are private endeavours that aim to pool investor funds to make a big real estate purchase. Syndications have a sponsor (or sponsors) that spearhead the project — selecting the building, planning the project, raising funds and executing it. The sponsor forms a legal entity, typically an LLC, and then finds investors (also called limited partners or passive investors) to put money into the project. The investor owns a proportionate share of the LLC and, thus, owns that percentage of the building and is entitled to their portion of the profits.
What are REITs?
At first glance, REITs are similar to syndications; however, a REIT is a company that invests in properties and needs to adhere to many other requirements as outlined by the SEC. Investors buy shares in the REIT and, thus, own that percentage of the REIT company rather than the property itself. As large corporations, REITs often trade on public exchanges and usually offer monthly income in the form of dividends.