REITS Archives - Cherif Medawar

REIT vs. Syndication: The Ultimate Guide

December 28, 2022August 2, 2022 by devteam

Differences between REIT and Real Estate Syndications

REITs and syndications are both types of real estate investments. REITs and syndications have a lot in common. What Is a REIT? REIT stands for “real estate investment trust.” REITs are companies that pool investor funds to purchase real estate assets like office buildings, apartments, and hotels. These properties are owned by the REIT and rented out to tenants. Investors receive a payout based on the property’s performance and an ownership stake in the company. The Securities and Exchange Commission (SEC) governs REITs and requires them to pay out 90% or more of their taxable income as dividends to shareholders. There are many different types of REITs based on their size, strategy, or focus. The most common type is an equity REIT, which usually focuses on owning commercial real estate properties such as apartment buildings or office buildings. Another type is a mortgage REIT, which focuses on financing residential mortgages instead of owning homes directly. What Is a Syndication? Syndication is an agreement between multiple investors and one or more property owners. In this agreement, each investor puts a certain amount of money into the deal in exchange for a share of ownership in the project, a specific project with a specific capital raise and end date. The Syndicator then raises and pools funding for the project and oversees its development and construction. Once the project is completed and sold, profits from the sale go back to investors based on their percentage of ownership and set terms of the syndication. The Syndicator may also be defined or called: Sponsor, Executive Manager; and may hold the roles of Property Manager (unless they hire on an outside Property Manager), Project Manager and overall CEO of the project. These roles and responsibilities will be defined in the Offering. How does real estate syndication work? Investors pool together money and use it to purchase properties that meet certain criteria determined by the syndicator or manager of the deal. In some cases, the manager then finds tenants for these properties who will pay rent on time every month, allowing investors to collect their share of the profits from renting out these units. An investor can make an interest return and get paid on the exit, as defined in the syndication. The Sponsor usually will hire a Property Manager who will then take care of everything else that comes up with managing a property – including repairs, maintenance and even leasing out vacant units if there are any left after all the tenants sign their leases. Main differences between REIT and Real Estate Syndications: Direct Ownership REITs offer direct ownership of the property through shares, while syndications involve indirect ownership through an investor group. With syndication, investors pool their cash together and purchase a share of property from a developer or seller. Shareholders don’t own any part of the property directly; they only own shares in the trust (or corporation). Value Volatility REITs are designed to provide stable returns with little or no volatility. This makes them ideal investments for retirement accounts or other long-term goals. Syndications, however, can be more volatile than traditional stocks due to their diverse nature and relatively short track record as an asset class. Tax Benefits REITs typically pay dividends at a higher rate than most stocks because they’re required by law to distribute 90% of their taxable income each year. This makes them an attractive choice for investors looking for yield without compromising liquidity. Syndications may also be eligible for tax benefits if structured as limited partnerships or corporations, but these benefits vary by state and type of partnership Diversification Real estate syndications are limited in the number of properties they can buy. Since they don’t have their own funds, they must rely on investors to fund each individual property purchase. This limits their ability to diversify by location or type of property. However, REITs have much broader diversification because they have their own capital and can purchase many different types of properties all over the country – as long as it’s in compliance with their charter. Liquidity Liquidity is important in real estate investing because it gives you the ability to cash out your investment quickly if needed. REITs are liquid because they’re publicly traded securities, but individual real estate syndication may not be. A REIT can be sold at any time, while syndication will take longer to sell because it involves several different parties. Investors who want the ability to sell their investments quickly should consider buying REITs rather than syndications. REITs vs. Syndications: Which is the Better Investment? Some investors prefer real estate syndications because they can choose specific properties and locations, while others prefer REITs because they offer more diversification and liquidity. Real estate syndications tend to have higher fees than REITs but give investors more control over the properties that they invest in. In addition, many people who participate in real estate syndications are able to profit from doing so without having to pay capital gains taxes on their earnings as long as they hold onto their shares for more than 12 months after purchasing them. Final Thought When it comes to the two types of passive income investments, many investors are hesitant to put their money in either one. Both Syndication and Real Estate Investment Trust (REIT) have their own pros and cons. It is up to individual investors to decide which investment is likely to give them the best return on investment. We will leave you with one more concept…. Could there be a structure that incorporates the benefits of a REIT and a syndication, and creates an even more powerful structure for Sponsors, those raising capital for real estate deals, and investors looking for a return??? YES. Yes, and that structure is a real estate fund. We will Crack the Code on that structure in our next post. Do you want to Crack the Code on RE Funds? Reach out to our office and learn about the power of Regd 506 … Read more

What Are Real Estate Funds And How They Work?

December 28, 2022March 24, 2022 by devteam

Investing in real estate is a lucrative strategy that attracts many entrepreneurs, which is why there are so many different types of real estate business models. People chose to find the deals and do the work themselves OR they choose to passively invest in REITS, hedge funds and real estate funds and syndications. Today we will focus on real estate funds and syndications. These are investment vehicles that enable sponsors to raise capital for deals and give investors the alternative to stocks, options, crypto and other investments to earn passive income based on the assets held in the portfolio. Sponsors structure a fund or syndication to legally raise capital for a broad range of real estate assets in an attempt to generate high returns, protect against potential losses, pay their investors and scale the portfolio. DEFINITIONS A real estate syndication is when a group of investors pools together their capital to jointly purchase a large real estate property. Apartments, mobile home parks, land, self-storage units and other real estate assets are some of the investment opportunities available through real estate syndications. A syndication is usually focused on one deal at a time. An investment or real estate fund is an entity formed to pool investor money and collectively purchase securities such as commercial and residential real estate. Thus, a real estate investment fund is a combined source of capital used to make real estate investments. A real estate fund may have a variety of projects under management at the same time. HOW DO REAL ESTATE FUNDS WORK? Real estate funds are a relatively new addition to the real estate market. Generally speaking, RE funds are pools of money — sometimes tens of millions or billions of dollars — managed by investment professionals. Unlike mutual funds, which must be registered with the Securities and Exchange Commission (SEC), RE funds are exempt from most standard securities regulations. However, they are filed with the SEC and are managed with Rules and Regulations that the SEC sets. There’s no single definition of what qualifies as a RE fund, but they typically share these four characteristics: They’re not registered with the SEC. They are filed. They must follow Blue Sky Rules. They may only accept accredited investors. Although there are exceptions with the Regd 506b; whereas if you have a preexisting relationship with the potential investor(s) you can accept up to 35 unaccredited. However, they must be sophisticated and the process to invest must be met. They use some combination of advanced investment strategies to maximize returns, such as short selling, leverage and derivatives. These real estate investment vehicles may invest in commercial properties, such as office buildings or apartment complexes, or residential properties. The fund may also invest in shares of publicly traded companies that specialize in real estate, such as homebuilders or mortgage lenders. Some real estate funds invest directly in property, whereas others use derivatives or other strategies to express their view on the real estate market. Some may combine these approaches within a single fund. Like any other fund, a real estate fund may charge management fees and performance fees depending on the type of structure used. Management fees are usually assessed on assets under management and are typically 1% to 2% annually. Performance fees are often charged at 20% of the profits generated by the fund above a certain hurdle rate such as 8%. WHAT IS THE DIFFERENCE BETWEEN REAL ESTATE FUNDS AND MUTUAL FUNDS? Real estate funds and mutual funds are two similar forms of investing that come with distinct differences. There are a few key differences between funds and mutual funds. Real estate funds have less regulation than mutual funds. They do not have to register with the SEC, and there are no requirements for how often they have to report what they own or how they’re doing so long as the total capital invested in the fund is under 20 million dollars. Obviously normal management, compliance and accounting processes must be in place. The only requirement is that fund managers must register with the SEC if they manage more than $100 million in assets and they must register with the Commodity Futures Trading Commission if they trade certain types of derivatives. Those who invest in funds must be accredited investors and have a net worth of at least $1 million. Funds typically have higher fees than mutual funds. Real estate funds are more liquid than mutual funds, allowing investors to enter or exit an investment faster. The sponsor or syndicator sets that timeline in their offering documents. Mutual fund managers have more constraints on how much risk they can take on, which limits their ability to generate big returns when markets are rising but also limits losses in bear markets. Mutual funds are required to report holdings every quarter, so investors know what the manager owns at any given time. Individuals can invest in mutual funds by buying shares directly from the mutual fund company or through brokers. There’s no minimum net worth requirement. HOW DO I INVEST IN A REAL ESTATE FUND? The rules for investing in real estate funds are rather different than those of other investments. To invest in most real estate funds, you must be an accredited investor. This means that you must meet one of the following criteria: You have an annual income of at least $200,000 (or $300,000 together with a spouse) for the past two years and expect to make the same or more in the current year. You have a net worth of more than $1 million, either alone or together with a spouse (excluding the value of your primary residence). Additionally, real estate fund investors typically must contribute at least one share to the fund itself. There are some funds that allow smaller contributions, but it’s unusual for these to be less than $25,000 to 100,000. For a Regd 506b you must have a preexisting relationship with the sponsor prior to investing. With a Regd 506c there … Read more