Key differences between REITs and syndications

At a high level, syndications comprising multiple properties look an awful lot like REITs (Real Estate Investment Trusts) so a reasonable question is why would you invest in a syndication, where your money is locked up for years, when you could invest in real estate through a REIT instead.

Of course, some syndications are for specific properties which are clearly different than REITs since there is only 1 property being held.

However, ever for multi-property syndications, from my perspective, there are major advantages to investing in syndications:

  • When you purchase a REIT, you are effectively buying shares in a company that is focused on managing real estate. The price of the shares is set by the market for those shares and not the underlying assets. It is entirely possible, and not uncommon, for the shares in the REIT to be valued at more or less than the value of the properties owned by the REIT and this valuation fluctuates with the broader stock market. While that gives you opportunity to sell your shares at an inflated price, it also means that your shares may drop even though the value of the assets has actually increased. And those changes can happen very quickly. As a long term, cash flow investor, I like to buy real estate at a price that makes sense and hold on indefinitely. As a result, I am less concerned about the opportunity to quickly liquidate my holdings – especially when that comes with a price disconnected from the underlying asset.
  • The fact that REIT shares are publicly traded means that there is always someone betting against you. In general, this isn’t a big deal since people have different motivations and for any purchase someone needs to be motivated to sell. However, in the stock market, people can gang up and change the share price based on factors outside the fundamentals of the property. For example, a large player or group of small players could artificially drive the price of a stock up or down by taking a large position for or against it, completely disconnecting the price of the stock from the underlying fundamentals of the business. This is what happened with GameStop in 2021 [1], a number of big players were betting on the stock to decrease in value while a large number of smaller investors were betting against them. The end result was a dramatic rise and then fall in the stock price that was completely disconnected from the fundamentals of the company. That type of betting doesn’t happen as much with privately held real estate, when the asset is the building itself, not the shares.
  • With a REIT, you are buying shares and getting dividends and you don’t actually own the underlying assets. While this can be a subtle difference from a philosophical perspective, since in a syndication you also own shares in the LLC, from a practical perspective, this is a huge difference. You are taxed on the dividends you are paid as normal income and you do not get any of the tax benefits of depreciation. This means that the REIT needs to produce returns that are 10-30% better than the syndication in order for you to end up with the same amount of money in your pocket after paying the IRS. That is a big deal.
  • REITs are inherently multi-asset, and often multi-asset-class investments. As a result, you aren’t able to align their investment strategy and your goals as well. When you are looking at a syndication, you are typically looking at an individual property or a small number of properties. That allows you to better understand the investment strategy being taken by the sponsor and make sure it aligns with your goals. While a REIT may have an overarching guiding theme, it can be challenging to understand how the individual properties contribute to that strategy.
  • REIT stocks are liquid and you can sell them any time. I know this can seem like an advantage, but I really don’t think it is. It makes it too easy to change your mind and abandon the plan that you have. When people see the stock market go down, many of them sell and miss the recovery – locking in their losses. By not being able to change your mind about an investment once it is made, you are protecting yourself from this very natural impulse.
  • While syndications are very clear about the fees that they charge, as they are outlined in the PPMs, the expenses and fees associated with REITs can be much harder to identify. Further, the reporting requirement for a REIT are much more intensive than for a syndication and that alone leads to a significant increase in overhead expenses. There is the expectation that these reporting requirements lead to an increase in transparency for the investors. However, I have not found that to be the case. I have always gotten all of the information I have requested from the deal sponsors for any deal I have invested in – and I have the ability to ask questions directly to the decision makers. Since the regulators looking at REITs are focused on correctness of the data as opposed to ensuring the business is well run, I think that additional reporting leads to a false sense of security.

As with all decisions, ultimately, whether or not a REIT is right for you is yours to make. I do encourage you to think about it within the context of your overall investment strategy and goals. If you feel that REITs are a better fit for you, then you should definitely go in that direction. However, go in with a clear vision about why they are the right investment for you when compared to the alternatives.

If you have any questions or comment about this post, please email them to me at blog@mbc-rei.com, I will reply to the questions that are straightforward and will turn the questions requiring more detailed answers into future blog posts.

For additional reading:

  1. https://www.tradingsim.com/blog/the-gme-gamestop-short-squeeze-explained

This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.