The real estate syndication can provide a unique and good way for you to start your real estate investment journey. When you are interested in making investment in real estate sector, but you don’t really have the time or the capability to manage it on yourself, then you can always look into real estate syndication.
In this event, you should be able to own a property and reap extra income from its management WITHOUT having to be a landlord yourself. How does it work? And how does it different from Real Estate Investment Trusts (or REITs)?
Getting to Know Real Estate Syndication and Its Concept
Also referred to as the property syndication, the real estate syndication (RES) happens when several investors are working together for a real estate project. They would collect money together so they can buy a property (usually a big one) also together.
These people combine their resources and money to buy a property that they can’t buy individually. After the purchase, they also work together to manage that property. So, basically, it’s a real estate partnership.
However, although they are supposed to work together to manage the property, not all of them would be involved in the process. In RES, there are two dominant players: the Syndicator and the Passive Investors.
Also known as GP (or General Partner), the Syndicator would be responsible for structuring the RES, as well as operating it. The GP has major responsibilities to:
- Underwrite the deal
- Arrange the finance
- Negotiate with sellers
- Build a (business) plan
- Find investors
- Raise capital for the transactions
- Manage asset
- Work with property management team
- Handle investor relations
From these lists, you can see that the Syndicator is responsible for everything, from locating the property to operating the asset. They are responsible for delivering strong returns.
The Passive Investors, on the other hand, simply provide the needed capital to buy the property. For their ‘contribution, they will get the property’s ownership share. When they own the piece (or share) of the property, they get passive income in a monthly or quarterly manner.
Real Estate Syndication vs REIT
So, how is RES different from REIT? It’s in the assets. With RES, you (and other investors) are collecting money together to buy a specific property. In REIT, on the other hand, you buy the share of the company managing the property.
It’s like this: In REIT, you are like buying a share of Samsung or Apple. In RES, you and other investors are working together to buy a specific Apple (or Samsung) product, such as iPhone 14 OR Macbook Pro Thunderbolt. See the difference now?
That is the biggest difference between RES and REIT. There are still specific details about the two:
- Investment control. Because investors in RES are targeting only a specific property, you can learn everything about it before making the purchase. You will be provided with detailed info to make the decision go easier. However, in REIT, you are investing on the company owning different properties and deals. You only need to know the company’s credibility and experience. You don’t even know what kind of property they will manage or deal with.
- Liquidity. Investing in REIT is like investing in stock or bond. You are free to buy it anytime, and you can also sell it anytime. It promotes greater liquidity. In RES, on the other hand, you will have to hold on to a specific asset for a certain time period, as the agreement has stated (and you agreed on it).
- Entry barrier or challenges. REITs are generally traded publicly, which means that investors won’t have to worry about the entry barrier. You are also free to buy how many shares you like. In real estate syndication, however, not only it’s only open (and available) to only accredited investors, but you will need to meet a minimum investment amount to join. Sure, the amount isn’t as much as buying an entire property by yourself, but still…. not everyone has that much money to qualify.
- Return. In general, investing in RES can be considered more lucrative with higher return than investing in REIT. But then again, you need to assess the condition, the overall requirements, and the process. Despite the huge financial profits, investing in RES isn’t for everyone.
Final Words
Now that you already know the difference, which one should you go with? Remember, there is no right or wrong when it comes to choosing the right investment type because each way has its own perks and flaws. Think about your financial condition and others.
Let’s say you have $1,000 and you want to be able to access it freely, then REIT would be the perfect option. If you have more money and you want to enjoy not only tax benefits, but also direct ownership, then RES would be the ideal pick.
It’s possible to start in REIT and then invest in RES, or vice versa. Or it’s also possible that you have both for diversification. No matter what, real estate syndication can be a good way to invest in real estate and there is nothing wrong about it.
- Advertisement -
