I was recently talking with a relative about my investments as a limited partner (LP). Not fully understanding the syndication model, he said, “so you’ve basically just invested in a REIT” (Real Estate Investment Trust).
On the surface, these two investments can seem one in the same. You put money into a deal, make no active decisions and receive distributions. However, there are a few glaring differences that I want to highlight. By understanding the risks and differences between the two investment strategies, I hope this will help you as the reader invest your money safely and wisely.
First, we need to understand what a REIT and Limited Partnership are.
In a very high level overview, real estate investment trusts (REIT) are essentially publicly traded companies who buy commercial real estate and give cash flows to their shareholders in the form of dividends. A main advantage that a REIT has over a LP Position in a syndication is the liquidity of the investment. Like any common publicly traded stock, a shareholder can buy and sell shares of the REIT at any moment. In exchange for this easily accessible liquidity, the returns do however, tend to be lower than you’d receive as an LP in a syndication.
On the other hand, a position as a Limited Partner in a syndication has a larger degree of risk compared to a REIT, but with more potential upside. Because of the “complexity” of the investments, the offerings are not publicly traded, but rather require the investor to have some sort of sophistication before investing in a deal. As mentioned earlier, any investment made in a syndication as an LP (or GP for that matter) should be considered Illiquid- not easily turned to cash, for the term set forth in the offering. On the bight side, when it comes to taxes, LP’s can participate in the Paper losses the real estate will experience in the early years, due to higher deprecation expenses.
Here is a chart I found online that breaks down the differences and advantages of each.
If you are an investor looking for an investment that earns steady and reliable returns that can easily be liquified, REITS are for you.
If you are an investor that is looking to really grow your wealth through Real estate and take advantage of the tax benefits, an LP position may be a fit. Just keep in mind the cost involved- higher risk and less liquid.