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Published December 2020. Updated October 5, 2023. 

If you are similar to many investors, you recognize the long-term value of real estate, and you want to diversify your portfolio — but you don’t want to be a landlord. The idea of collecting rent, paying the bills, and responding to tenant calls isn’t very appealing.

This is completely understandable, but there are still real estate investment options worth considering.

Two such real estate investment vehicles that eliminate the direct landlord responsibilities and their associated hassles are Real Estate Investment Trusts (REITs) and Private Real Estate Syndications with multi-tenant properties. So, what’s the difference between these options, and which one is right for you?

Today, the Kenwood Management experts walk through a few ways we recommend evaluating the differences between these two investment strategies to choose the best model for your goals.

Evaluating REIT vs. Syndication With 7 Criteria

To evaluate REITs and private syndications, we will analyze them using seven different criteria.

  1. Properties Invested In

  2. Ownership and Control

  3. Ease of Access to Invest

  4. Investment Minimums and Dividends

  5. Liquidity

  6. Tax Benefits

  7. Returns

These criteria can help investors choose a long-term investment strategy that fits their goals and preferences for building wealth!

Keys with Word Investment on Golden Label, REIT vs. syndication concept.

1. Properties Invested In

With a real estate investment trust, you are investing in a company that typically owns a portfolio of similar properties (such as apartments or office buildings) across multiple locations and markets.

For example, an office building REIT may own properties in top-tier markets, such as New York, Los Angeles, and San Francisco. They may also own properties in secondary markets like Tucson, Tulsa, and Des Moines.

This can provide an investor with diversification across geographic regions; however, you are investing in all the properties across their portfolio. Additionally, specific details related to the properties themselves, such as who the tenants are and their specific rental rates, are generally only shared with Wall Street analysts and not the general public.

However, when you choose a private real estate syndication, you are typically investing in a single property in a specific market. You also generally receive more information about the property than a REIT would offer.

You know where the property is, how close it is to a major highway or mass transit, and the major tenants for the property. You are also provided with financial projections to assist in your evaluation.

2. Ownership and Control

When you invest in a REIT, you purchase shares in the company, just like any other public company, such as Apple or Clorox. You actually don’t own the underlying real estate.

Additionally, you can’t decide which properties the REIT buys or sells or which cities or submarkets they choose to invest in. You can’t request that the REIT managers only put my money in the New York and Los Angeles buildings. You own a slice of all the properties, wherever they happen to be situated.

In contrast, with a private syndication, an investor is a limited partner. Together with other limited partners and the general partners, they own the property directly, usually through a limited liability company (LLC).

Additionally, since private syndications typically buy a single property or a small group of properties, you have some control over the purchase. You know exactly what you are buying, where it is, and the financial projections. You evaluate everything and then decide whether to move forward or not.

3. Ease of Access to Invest

Since REITs are listed on the stock exchange, it is simple to find them, and they are easy to invest in. You can access the current share price on your computer or cell phone and, within a few minutes, be invested in that company.

Investing in private real estate syndications is not as simple. They can be more difficult to find, and the process of investing is more involved.

Typically, you will receive a Private Placement Offering (PPO) that describes the opportunity and legal documents to become a limited partner in the LLC. As a result, it is important to consider only private syndicators like Kenwood Management, who have a track record and can document their performance.

4. Minimum Investments and Dividends

Since buying shares in a REIT is just like purchasing any public company, the minimum investment is as little as the cost of one share. It is also very easy to purchase additional shares at any time.

REIT dividends are typically paid quarterly and frequently range from 3-5% annually. REITs, by law, are required to distribute at least 90% of their taxable income in the form of shareholder dividends.

Private syndications have higher minimum investments, typically $25,000 to $50,000. Dividends (or Preference Payments) are frequently paid quarterly and are often higher than those offered by REITs and can range from 5 to 8% annually.

5. Liquidity

When considering liquidity, REITs are generally more advantageous. You are not locked into an investment for a specific time frame. When you want to sell your shares, you simply log onto your computer and sell them with the click of a mouse.

However, investing in private syndications is very similar to direct ownership, like your home. You couldn’t sell your home immediately.

Syndications inform their investors upfront about the anticipated investment duration. It might be five to ten years before you may have the opportunity to access your initial capital. However, many reputable private syndicators do offer a means to access your capital earlier if needed.

6. Tax Benefits

Tax benefits are one of the biggest advantages of real estate investments over stocks and bonds. Depreciation, one of many tax benefits, can be substantial because it provides the ability to offset certain types of income.

When you invest with a private syndication, these advantages are fully available to each investor. You typically receive a K-1 Partnership tax form each year, and depreciation offsets net income generated by the property. If the depreciation exceeds the property’s net income, a negative number appears on the K-1, and that loss may be utilized to offset income from other sources.

However, when you invest in REIT shares, depreciation is factored in before you receive dividends, but you don’t benefit from any tax breaks beyond that. You also can’t utilize that depreciation to offset other income.  

7. Returns

Returns are still the most important metric investors evaluate when deciding where to invest their money. When it comes to real estate, returns are generated from two sources — cash flows and appreciation.

For private syndicators, cash flows are typically referred to as preference payments, which is the distribution issued to the investors based on the property’s available cash flow. Appreciation can be captured either through refinance proceeds (refinancing a property’s initial loan with a new one based on the property’s appreciated higher value) or from a sale.

For a REIT, returns come from dividends (remember that REITs must distribute at least 90% of their taxable income as shareholder dividends) and stock price appreciation (as opposed to the property’s appreciation). This distinction is important because sometimes a REIT stock may be influenced by the overall market’s movement as opposed to the underlying property value.

A Real Life Comparison

Now, let’s compare the returns for specific REITs versus an actual private syndicator. The graphs below depict the returns generated through 2020 by eight Kenwood Management properties. As a private syndicator, we owned these properties for more than ten years.

The REITs included in these graphs are the Fidelity Real Estate Investment Portfolio (FRESX) and the Vanguard Real Estate Index Fund (VGSIX). Returns are available from public sources and represent dividends plus stock price appreciation.

For Kenwood, the returns illustrated represent only preference payments and refinance proceeds. They do not represent the property’s final sale. Because Kenwood owned these properties at the time these charts were created, the full appreciation is not represented in the graphs.

However, even without including the full appreciation amount, every one of Kenwood’s properties has exceeded the Fidelity Real Estate Investment Portfolio (FRESX) and the Vanguard Real Estate Index Fund (VGSIX) returns over the same period.

Kenwood Management, Kenwood Building investment returns

Kenwood Management Nova Industrial investment returns

Kenwood Management Nova Storage investment returns

Kenwood Management Dulles Design Center investment returns

Kenwood Management Lottsford investment returns

Kenwood Management Hampton investment returns

Kenwood Management Preston Court investment returns

Kenwood Management Westmore investment returns

Learn More About Passive Income from Private Syndication With Kenwood Management

Now that we have outlined some of the key distinctions between REITs and private syndication, you can evaluate which option is best for you.  

If you are interested in more information about Kenwood’s private syndication opportunities, please contact us today.

Disclaimer: This article may contain “forward-looking” statements based on Kenwood’s current expectations, estimates, and projections about future events and financial trends affecting Kenwood. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which the Kenwood cannot predict with accuracy and some of which the Kenwood might not even anticipate. Although Kenwood believes that the expectations, estimates, and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, Kenwood can give no assurance that these expectations, estimates, and projections will be achieved. Kenwood acknowledges that prior results are not necessarily indicative of future results. Future events and actual results may differ materially from those discussed in the forward-looking statements, and Kenwood undertakes no obligation to update or supplement any forward-looking statements.