So you’ve worked hard and made a good career for yourself and want something to show for it. Real estate seems like an attractive enough venture – but how do you get started? Beginner investors looking to dip their toes into the world of real estate often look to two options: traditional crowdfunding and real estate syndication.
Both methods are traditionally used when investing in multifamily properties, such as condos, apartments, and townhouses. However, these kinds of investments can be cost-prohibitive to beginner investors, so they often collaborate and combine their resources to reap the advantages of multifamily investment collectively.
However, real estate syndication and traditional crowdfunding differ in critical ways. In this article, we will dive deep into all the differences between the two methods and how to decide which one is right for you.
Real Estate Syndications Explained
First, we’ll talk about real estate syndication. This investment method has more stringent regulations, but you might find that that’s exactly what you want right now.
What is Real Estate Syndication?
Real estate syndication is where a group of investors pool their financial resources and partner with a syndicator to purchase and manage a real estate property. Syndicate investors are often new to investing or real estate, making this a perfect opportunity for those who want to learn the ropes. Generally, real estate syndicators only partner with accredited investors, so you will likely have to meet financial requirements before investing.
The syndicator, acting as a business entity, assumes the day-to-day operational responsibilities of the property, such as leasing, maintenance, and management. Investors, in turn, contribute capital and receive passive income from the profits generated by the property. This structure is a popular way to diversify real estate investments while enjoying the benefits of passive income.
Role of Syndicators
The primary role of a syndicator is to identify and evaluate potential investment opportunities within the chosen real estate sector – for the sake of ease, we’ll focus primarily on multifamily real estate in this article. Syndicators utilize their market insights and experience to pinpoint properties with substantial growth potential, ensuring alignment with investment objectives.
Once the property is acquired, syndicator entities assume responsibility for overseeing the day-to-day operations of the property. This includes routine maintenance, value-add ventures, tenant acquisition and management, and more. You don’t have to worry about the complicated and sometimes tedious aspects of being a real estate investor; the syndicator handles everything on your behalf.
Pros and Cons of Real Estate Syndication
Investing in real estate syndication is a wise choice for some, but it’s not without its drawbacks.
Here are some of the benefits of joining a real estate syndicate:
- Diversification: Real estate syndication allows investors to diversify their real estate holdings without the need for significant capital, reducing risk.
- Professional Expertise: Syndicators typically possess specialized knowledge and experience in real estate, enhancing the likelihood of successful investments.
- Passive Income: Investors can enjoy passive income from rental returns and property appreciation, often without the hands-on involvement required for sole ownership.
- Shared Costs and Risks: Syndication spreads costs and risks across multiple investors, making it more manageable for each participant.
- Access to Larger Properties: Syndication provides access to larger and potentially more profitable real estate opportunities than an individual investor could afford.
- Active Management: Syndicators handle day-to-day property management, reducing the burden on passive investors.
Conversely, some drawbacks to keep in mind before investing include:
- Limited Control: Passive investors have a limited say in property management decisions, relying on the syndicator’s expertise.
- Lack of Liquidity: Real estate syndication investments are less liquid than stocks or bonds, making it challenging to access capital quickly.
- Market Risks: As with any real estate investment, syndication is susceptible to market fluctuations and economic downturns – though multifamily real estate is a surprisingly stable investment vehicle.
- Complexity: Real estate syndication can be complex, involving legal documents and partnership agreements, requiring investors to understand the intricacies of the deal.
Tax Benefits
Real estate syndications have several tax-off setting advantages. First, an experienced syndication team will structure the deal to provide depreciation and a lower tax rate on capital gains income opportunities. Then, they will guide investors on the best tax structures ad strategies come tax time.
Investors in a real estate crowdfunding project are usually taxed at the ordinary tax income rate. However, they may have access to capital gains tax rates if invested in the project for a minimum amount of time (one year).
Crowdfunding in Real Estate
Crowdfunding is very similar to real estate syndication, but with one key difference: there is no syndicator or other entity that investors are partnering with. Investors are, more or less, on their own.
We believe syndication is the ideal investment strategy for busy physicians and professionals for three key reasons:
- Real estate syndicators invest in higher income-generating real estate opportunities, such as multifamily properties that have been heavily researched and backed by a thorough research process.
- They offer substantially higher returns in the form of dividend payouts.
- Real estate syndication is more professionally rewarding and is a recommended strategy for high-income investors by sites such as Passive Income MD.
As physicians, we created Viking Capital to deliver a better investor experience and returns for doctors and others with significant wealth goals. Our track record of successful deals and significant returns makes our investment strategy an ideal solution for physicians.
What is Real Estate Crowdfunding?
Real estate crowdfunding is a relatively new investment strategy that primarily takes place online. It presents a wide array of real estate opportunities to potential investors through dedicated crowdfunding platforms. Unlike traditional real estate investments, which often require substantial capital and significant personal involvement, crowdfunding offers a more accessible entry point into the real estate market.
Here’s how it typically works: Real estate developers or sponsors list their projects on crowdfunding platforms, specifying the funding needed and the investment terms. These projects range from residential and commercial properties to development ventures or real estate loans. Individual investors can browse these offerings, reviewing project details, financial data, and the proposed return on investment. If an opportunity aligns with their financial goals and risk tolerance, they can contribute funds to the project. The collective contributions from investors help finance the project, and in return, investors receive a share of the project’s profits or rental income, depending on the terms of the investment.
There is usually a sponsor or lead investor in place of a syndicator in this strategy. This is often the person who acts as a point of contact between investors and developers and leads the marketing, accreditation, and all communication relevant to the property.
Pros and Cons of Real Estate Crowdfunding
Real estate crowdfunding offers unique advantages and drawbacks as an investment approach.
Here are some of the benefits of real estate crowdfunding:
- Diversification: Investors can spread their capital across multiple real estate projects, reducing risk through diversification.
- Accessibility: Crowdfunding lowers the barriers to entry, making real estate investment available to a broader range of individuals, including those with limited capital.
- Passive Income: Investors can receive a share of rental income or profits without the active involvement required in direct property management.
- Low Initial Investment: Crowdfunding often allows investors to participate with relatively small amounts of capital.
- Choice of Projects: Investors can choose from various real estate opportunities to align with their financial goals and risk tolerance.
But on the other hand, the drawbacks of real estate crowdfunding are pretty significant:
- Lack of Control: Investors have a limited say in project management decisions, relying on the expertise and choices made by the project sponsors.
- Fees: Crowdfunding platforms may charge fees, impacting overall returns.
- Lack of Liquidity: Real estate crowdfunding investments are less liquid than traditional assets like stocks or bonds, making it challenging to access capital quickly.
- Market Risks: As with all real estate investments, crowdfunding carries the potential for market fluctuations and economic downturns.
- Regulatory Risks: The crowdfunding industry is subject to evolving regulations that could impact the investment landscape.
- Variance in Project Quality: The quality and performance of real estate projects may vary, leading to potential differences in investment outcomes.
- Potential Lack of Protections: Investors may have limited legal protections in case of disputes or project failures, depending on the specific crowdfunding platform and legal framework in place.
Accredited Investors and Why They Matter
Some real estate syndicates and crowdfunding platforms require you to be an accredited investor before investing in a property. This is a measure put in place to prevent low-income investors from parting with too much of their money or taking on too much debt.
An accredited investor is someone who, according to financial regulations set by the SEC, meets specific income and net worth requirements. In the U.S., this typically means having an annual income of at least $200,000 (or $300,000 for a married couple) for the past two years, with an expectation of the same income in the current year, or possessing a net worth of at least $1 million, excluding your primary residence. It’s a way to make sure people who can handle the risks get access to these kinds of investments.
You don’t have to seek accreditation on your own; it’s not like you write a letter to the SEC and they send you a certificate of accreditation. Instead, the company you invest with is responsible for verifying your net worth and annual income. You may have to provide proof of income or other tax forms to your investment vehicle of choice to prove your status.
Most real estate syndicators will require you to be an accredited investor to invest in their properties. This limitation is put in place to protect you from investing more money than you can afford to lose, but it can be a hurdle if you are early-career or otherwise do not qualify.
Some crowdfunding platforms require you to be an accredited investor, but others do not; you may be able to try your hand at low-stakes investing by investing small amounts in a crowdfunding project. While this may seem democratic, it may point to a lack of regulation – ensure that you are heavily vetting any platform that does not have these protections in place.
Key Differences Between Syndication and Crowdfunding
Though there are definite pros and cons to each investment strategy, both investment models cater to different investor preferences and financial circumstances. Neither one is necessarily better than the other; they just offer different pathways to the same goal.
Investment Structure
Real estate syndication operates through a shared ownership model. When you join a real estate syndicate, you become an equal co-owner of a property or project. Each investor contributes capital and obtains a direct ownership share in the asset, which means they both share in the potential risks and rewards of the investment. This structure enables a more conventional approach to real estate investment, where a group of co-owners collectively oversee the property.
On the other hand, real estate crowdfunding adopts a fractional ownership approach. When investors take part in a crowdfunding campaign, they buy fractional shares of a property or project. Under this arrangement, multiple investors pool their resources, with each owning a portion of the property. This method offers greater flexibility, allowing investors to hold smaller stakes in different properties without shouldering the obligations of direct ownership.
Control and Decision-Making
Real estate syndication typically entails limited control for individual investors. The management and decision-making processes for the property are delegated to the syndicator or sponsor. These individuals or entities, who often possess specialized expertise in real estate, assume responsibility for the day-to-day operations and strategic decisions related to the asset. While investors may have a say in certain matters through legal agreements, they generally rely on the expertise of the syndicator for property management.
Similarly, real estate crowdfunding also involves limited influence over project management for investors. Project sponsors or managers are responsible for the day-to-day operations and key decisions regarding the property. Investors in crowdfunding campaigns typically lack direct control over property management and rely on the expertise and judgment of the project sponsor for guidance.
Investment Size and Liquidity
Real estate syndication typically involves larger initial investments from investors. This approach often demands substantial capital for participation in a syndicate, as investors collectively acquire ownership of the property. However, this larger investment usually translates into lower liquidity, making it challenging to quickly convert a share of the property into cash.
However, real estate crowdfunding offers a more accessible entry point for investors due to its smaller investment size. Individuals can invest in crowdfunding projects with relatively modest amounts of capital, making them more inclusive and appealing to a broader audience. This approach also provides greater liquidity, as fractional ownership allows for easier trading of shares in the property. Investors have the flexibility to enter and exit investments more readily, enhancing liquidity.
Choosing the Right Investment Approach
When deciding between real estate syndication and crowdfunding, several factors come into play. Your choice should align with your financial goals, risk tolerance, and other vital considerations. Here are some factors to keep in mind:
Risk Tolerance
Defining your personal risk tolerance ahead of an investment is critical. Risk tolerance refers to how comfortable you are with possibly not making some of your investment back.
While both methods of real estate investing carry inherent risks, real estate syndication is the more stable of the two. Despite requiring a larger upfront investment, it offers a higher degree of regulation over returns. In syndication, both you and the syndicator are bound by a contractual agreement outlining profit distribution. Additionally, direct property ownership is a massive boost to your investment portfolio.
By contrast, when you have a fractional share of a crowdfunded property, you will see smaller returns on smaller investments. You are also more exposed to market conditions via crowdfunding platforms, and if your sponsor or lead investor isn’t skilled, you may end up losing money in the end.
Investment Goals
Consult your larger investment goals before deciding which strategy to utilize. Syndication is ideal if you seek direct ownership, more significant potential returns, and a higher level of involvement in property management. Crowdfunding is suitable if you aim for more accessible entry points, diversification across various properties, and potentially more liquidity. Evaluate your specific financial objectives and how each approach helps you achieve them.
Liquidity Needs
Assess your liquidity needs to determine the most suitable approach. Syndication typically offers less liquidity, as your investment is tied to the property’s ownership. Crowdfunding provides more liquidity, allowing you to enter and exit investments more readily. Decide before you invest whether you want that money to be inaccessible for the length of your contract or if you want the ability to pull your cash if you need it urgently.
Diversification Strategies
Diversification is a crucial aspect of your investment approach. Syndication might limit your diversification as you co-own one or a few properties. However, it will allow you to place higher-value properties into your portfolio and is a great way to enter the world of larger multifamily investments.
Crowdfunding allows for broader diversification, as you can invest in fractional shares of various projects for the same amount. But, having fractional shares in many properties may harm you more than it helps. Your portfolio may end up too reliant on specific markets, and it may become oversaturated in real estate ventures rather than a healthy balance of different investments.
Though real estate syndication and crowdfunding seem similar on the surface, when you learn more about them, their investment strategies are incredibly different. Each approach has different goals and unique strengths; they appeal to various investors and offer accessible ways to invest in real estate without being the sole financier. Whether you’re looking to build up your wealth to qualify as an accredited investor or want to use your savings to generate some passive income, consider teaming up with others to achieve your goals.
If you’ve decided that syndication is right for you, see what Viking Capital has to offer. We’re a top-rated real estate syndicator with multiple properties in multiple states for you to choose from. From large-scale resort condo complexes to humble apartments, we have a plethora of multifamily investment options for you. Check out our portfolio today.
