A common question is: What is a real estate investment trust (REIT), and how does it differ from a real estate fund or a real estate syndication? Let’s talk about those differences.

Let’s start with REITs. Real estate investment trusts are a kind of real estate fund that accumulates real estate and pays out based on the income of that real estate. All REITs are required to pay out 90% of their income derived from rents as dividends to their investors.

A REIT is a sub-classification of the tax code. It’s not a different kind of security as far as the SEC is concerned. This means there are REITs structured as Regulation D offerings, Regulation A offerings, and public REITs. To qualify, they must meet certain requirements: a certain amount of ownership needs to be in people other than those managing, they pay out 90% of their income, 75% or more of their holdings are in real estate specifically, and they have more than 100 investors not part of the management team.

The benefits of a REIT are that they are very liquid, especially public REITs. You can trade them on the stock market, logging into your brokerage account to make a trade and sell it the very next hour. Real estate funds and private REITs are less liquid, but private REITs have specific mechanisms to make it easier to liquefy positions at regular intervals.

When a REIT is put together, the greatest challenge is determining net asset value. This only comes into play for private REITs, which usually calculate it on a monthly basis. For public REITs, net asset value is computed naturally by the public market, with the share price determined by market perception.

Let’s go through the main takeaways and key points of REITs and real estate funds:

  1. REITs are companies that buy and manage property, generating income primarily from rents. They distribute 90% of their profits as dividends to shareholders, with their main benefit being liquidity.
  2. Real estate funds and syndications gather funds from multiple investors for buying, managing, developing, and selling properties. They generally have less liquidity and larger minimum investments but offer a wider range of options.
  3. Investment in real estate funds offers benefits of diversification and professional management but is subject to market volatility. They generally have fewer holdings than REITs, which can be quite large.
  4. REITs and real estate funds have different tax implications. REIT dividends are subject to income tax, whereas real estate funds and syndications generally target being taxed at the capital gains rate.
  5. As a syndicator or real estate fund manager, consider what’s best for your investors and your investment theory when deciding whether to structure as a REIT or not. Success is not tied to being a publicly traded REIT but to doing the kinds of deals and funds you want and working with the investors you prefer.

My name is Tilden Moschetti. I am a real estate syndication attorney with the Moschetti Syndication Law Group. I hope this video helped explain the difference between REITs and private equity funds and syndications. If we can help you on your journey, whether it’s to become a REIT, a private equity fund, or a syndicator, give us a call. We can help you stay compliant with Regulation D Rule 506b and 506c and offer expert guidance to ensure you reach your goals.