There are various ways that you can invest in real estate today. You can buy single homes in need of repairs or renovations and fix them up to resell (fix and flip). You can also buy and hold residential properties for resale when their market values increase. If you are looking for lucrative rental properties, you may choose to buy multi-family homes and become a landlord, collecting monthly rent fees.
Yet, many real estate investors today are deciding to invest in large multifamily, retail, industrial or other commercial property types. Due to the high market prices for these large buildings or complexes, these savvy investors are turning to crowdfunding or joining with other investors to fund syndication real estate investing deals. Either of these choices will bring them passive investing returns with the single major requirement of pooling capital with other investors for making a property investment.
Real Estate Crowdfunding vs. Property Syndication
Today, there are different ways of investing in real estate and gaining substantial financial returns on investment (ROI). Investors with different amounts of capital to invest can contribute equity capital equal to only a small portion of the property price and gain a share in the investment profits. Many property investors are now choosing to invest in property deals through real estate syndicates.
You may have heard the terms “crowdfunding” and “syndication” used interchangeably in discussions concerning real estate investing (REI). However, these two methods of investing in properties have major differences. Once you understand the varied ways in which they are different, you can best determine which method is best for your own REI pursuits and building a lucrative property portfolio.
Major Aspects of Real Estate Syndication
A real estate syndicate consists of a group of property investors who pool their capital, knowledge and experience for investing in a property deal. Another member of the syndicate is the sponsor, operator or general manager. The investors are referred to as the limited partners, while the sponsor is known as the general partner.
As passive investors, the limited partners have completed their primary function when they have pooled their resources for making the investment. At this point, the sponsor takes over, managing all other aspects of the property investment deal. These tasks may include overseeing the overall operations of the property, hiring a property management team and issuing periodic payouts and dividends to each investor. The final task of the sponsor will be transacting the future sale of the investment property.
Every real estate syndicate is required by the Securities and Exchange Commission (SEC) to be registered as a legal entity like an LLC or LP. The primary advantage in property investing through a syndicate is the opportunity of participating in investments involving large commercial properties using only a limited amount of capital.
Large property syndication deals may involve the following investing activities:
- Purchasing large apartment buildings or complexes;
- Buying multi-purpose, industrial or retail properties; or
- Refurbishing and leasing several properties.
In the majority of real estate syndicates, the sponsor (general partner) usually supplies most of the knowledge-based resources. These may include real estate market information, deal negotiating expertise and a thorough understanding of investing regulations.
Typical Real Estate Syndication Company Operations
At the head of every real estate syndicate is the sponsor with the knowledge and experience to professionally manage a large property investment. The sponsor’s main goal is typically purchasing income-generating properties without investing more than a small amount of their own capital.
The syndication company headed by the sponsor is responsible for identifying potentially lucrative property-investing opportunities. The company must also handle necessary negotiations with the property seller. After that, the investment business plan for producing attractive ROI for the investors must be drafted.
Before any property investment is transacted, the syndication company must perform careful and detailed due diligence on the investment property and its location. Property inspections and any necessary audits must also be scheduled and completed. After the completion of these essential preliminary tasks, the company can use the funds from the investors to close the property investment deal.
The task of collecting and distributing cash payouts as preferred returns to investors is also handled by the syndication company. In addition, if the investment property’s market value increases to a good selling price, the company will sell the property after gaining approval from the passive investors.
Primary Features of Crowdfunding
Crowdfunding is a method of raising funds for a project from a large group of people. This type of project may involve dozens or even hundreds of individuals. Each participant contributes a small portion of the total amount needed. In real estate, crowdfunding is a type of alternative financing used to attract investors with available funds to contribute to a variety of property investments.
It enables real estate investing professionals to make connections with individuals with an interest in property investing. While syndication relates to the structure of management of an investment partnership, crowdfunding refers to a particular method of connecting property syndicators with potential passive investors. Crowdfunding platforms are also used by some real estate syndicates to contact potential investors.
The term “crowdfunding” may have two different implications relative to real estate:
- A method used by sponsors for raising funds; and
- A standalone model for real estate investments.
Detailed Comparison of Syndication Property Investing and Crowdfunding
These two models are closely connected in some ways, yet they offer different opportunities, advantages and disadvantages, including the following:
- Equity Supplied by Investors. Syndication investing is based on equity, while REI crowdfunding can involve loans or equity-based investing. This allows investors to decide whether to offer a loan for an attractive financial return without gaining any percentage of ownership in the property.
- Term of Investment. You may wonder how long the sponsors and investors engage in these real estate investing deals together. A typical property syndicate endures for at least five years, and some last for ten years or longer. However, crowdfunding usually involves more temporary relationships that may last only two years.
- Investment Scale. Property syndications and crowdfunding ventures suggest the very same thing: several or many investors combining financial resources to purchase an investment property.
However, real estate syndicates typically offer larger property investments, such as expansive commercial-industrial real estate, large apartment complexes or spacious development land. In contrast, crowdfunding properties are usually smaller. These properties may include duplexes, small retail stores, restaurants and other smaller-scale real estate.
- Number of Participating Members. Crowdfunding is quite popular since anyone who can meet the basic investing requirements can participate. While one investor may put in $500, another may contribute $25,000. These investment deals may require a minimum investment amount, but no maximum sum.
This can enable anywhere from dozens to hundreds of investors to contribute to a single property investment. Yet, a property syndicate is a significantly smaller partnership that is usually made up of just a few investors who often contribute similar or the same amounts, although these investment capital amounts can vary considerably.
- How Sponsors Gain Profits. An investment sponsor is the individual or the business entity that negotiates the property deal and is responsible for raising the investment capital.
Syndication sponsors may be granted a sweat equity stake in an investment property as well as a preferred return. The sponsor also typically receives commissions for locating and closing the real estate deal along with management fees. In comparison, crowdfunding platforms behind each deal typically generate money via processing fees.
Real Estate Investing Partnerships and REITs
A common misunderstanding is that real estate syndication is the same as or very similar to REITs. Yet, REIT is an abbreviation for “real estate investment trust.” The trust is a business entity that finances, operates and has ownership of a variety of income-producing properties.
An REIT actually has more similarities to a mutual fund. The company raises funds from different investors for making property deals. The investors then are stakeholders in the REIT, but not in the actual properties. The investors receive returns as monthly or quarterly dividends, which are distributed from the company profits. REITs have popular appeal due to their high degrees of liquidity.
REITs do not allow investors to have any say in the properties that they buy. Nor do the investors have any input concerning the management of these properties or the amounts of tenant rental fees. However, real estate syndicates grant more direct property control to the passive investors. Although REIT shareholders do have company voting rights, they have no control concerning the properties held by the company.
There are various types of real estate investments to choose from as a newcomer to property investing. Two of the most popular investing forms for acquiring lucrative ROI as a passive investor are syndication property investing and real estate crowdfunding.
While property syndicates are composed of small numbers of investors plus a sponsor or operator, crowdfunding can involve from dozens to hundreds of investors and a platform that generates funds through processing fees.
While real estate syndicates generally offer large multifamily and other commercial property investments, crowdfunding usually involves smaller properties. Real estate investment trusts (REITs) are also popular forms of property investments. REITs are attractive to investors due to their high degrees of liquidity.
Real estate investing in its various forms can provide high ROI and is considered an attractive investing choice with the potential for building a lucrative portfolio. Although property investments typically have higher risk than the stock market and other types of investing have, CRE investing offers high potential for much greater financial returns. By performing quality due diligence and obtaining expert advice before investing in properties, you can enjoy excellent rates of success as a real estate investor.