With real estate being one of the most reliable wealth-building industries in the world, more and more investors of different tiers try to diversify their portfolios with real estate assets.
Traditionally, real estate has been very profitable for wealthy individuals and companies. Buying homes, commercial buildings, and even land for development doesn’t come cheap. Rent can be a reliable revenue stream that provides substantial cash flow.
However, buying a property through a loan means that the investor might not get an amazing return until they’ve repaid the entire sum to the lender. This can take years, and people want to make money much faster.
These days, there are multiple opportunities to enter the real estate market and make a killing, even for the little guy. Similar to buying fractional shares, investors can put up equity capital to cover only a portion of the property’s cost, thus becoming entitled to a share of the profits.
Real estate syndicates are a popular way of doing this, and when done right, they can be the most reliable option.
But people new to this industry, and even some veterans, might get the terminology confused. Often, crowdfunding and syndicating are used interchangeably.
This article will explain why that’s misguided and outline the differences so you can make a more informed decision with your real estate investment plans.
This is the process of forming a syndicate of real estate investors who pool together their combined financial and intellectual resources to make a property deal. The resulting syndicate is a partnership between a sponsor, syndicator, or general manager and multiple passive investors.
A real estate syndicate has to become registered as a legal entity such as an LLC or LP, as per the SEC regulations. Now, the scope of this type of partnership is to allow investors with limited capital to participate in bigger deals like:
Under a real estate syndication partnership, the sponsor handles the daily operations and management. At the same time, the passive investors put up the bulk of the capital for the downpayment or the entire building cost (depending on the deal.)
An important note here is that the sponsor typically brings most, if not all, of the intellectual resources to the table – real estate market knowledge, negotiating experience, an understanding of regulations, etc.
To further learn how real estate syndication works and what’s behind this type of partnership, let’s take a look at what real estate syndication companies do.
At the head of any reliable legal entity of this nature sits a professional, experienced deal sponsor. That’s someone with experience in real estate and the goal to buy income-producing properties while using little to no capital of their own.
Therefore, a syndication company has to first identify opportunities to buy properties. Then, the company handles all negotiations with the seller.
From there, a real estate syndication company is responsible for drafting the business plan and deciding how the property will operate – how it should be managed, how to make money from it, etc.
The syndication company is also responsible for the due diligence aspect. With any property purchase, whether for homeownership, development, and anything else, there’s a need to perform inspections, audits, etc.
Since real estate syndicates need to be compliant with SEC regulations, it’s down to the company to create the paperwork – making the syndicate a legal and enforceable entity.
Only when these things are checked off the list will the syndication company start raising money from accredited investors or non-accredited investors. If necessary, the company can identify and apply for mortgage loans.
From there, the company closes the deal and transitions into ownership and management operations. Similar to how a property developer would communicate with investors or homeowners regarding any progress, so does a syndication company. It has to consistently update passive investors about where they stand in relation to their mutual goals.
Because the other investors in this partnership don’t have anything to do with the property, the syndication company has to collect and distribute cash proceeds in the form of preferred returns. Furthermore, should the property reach a valuation where it’s worth selling, the syndication company will handle that aspect, as well, once it receives approval from the other investors.
Crowdfunding is a way to fund a project with money raised from a large group of individuals. Typically, this type of venture can have dozens or hundreds of people involved, each contributing a small amount to the target sum.
As a form of alternative financing, crowdfunding is responsible for billions of dollars raised every year. In modern times, such a venture usually seeks investors over the internet.
The scope of a crowdfunding campaign can be anything from raising money for a trip to shooting a movie. Generally, investors receive something in return upon the project’s completion, depending on the proposed rewards and the invested amount.
An offshoot of traditional crowdfunding, real estate crowdfunding is a niched form of alternative financing that aims to attract investors with sufficient capital to participate in various property investments.
In essence, it refers to the process in which real estate professionals connect with would-be investors.
Despite crowdfunding and syndication being used interchangeably, the two are completely different things. Syndication refers to the structure under which an investment partnership is managed, while crowdfunding is a specific way to connect syndicators with would-be passive investors.
Regarding real estate syndicates, sponsors can get in touch with potential investors through real estate crowdfunding platforms.
From there, investors can learn about the various opportunities available to them. Once all parties involved agree to the terms of the proposed deal, they can move forward into real estate syndication and form a partnership under a legal entity to purchase, manage, and rent a property.
However, the term crowdfunding can have two connotations in real estate:
Let’s go over these differences.
Although the models are somewhat interconnected, they provide different opportunities, benefits, and drawbacks.
Syndications are equity-based, while real estate crowdfunding can feature both loans or equity-based investments. This means that investors can choose whether to offer a loan for a desirable rate of return without having ownership in the property.
How long do investors and sponsors collaborate on these deals? It depends. The usual real estate syndicate lasts a minimum of five years, with some partnerships going upwards of 10 years.
In contrast, crowdfunding implies much more temporary relations that can end after as little as two years.
This is where things get interesting and also confusing for some people. Both syndications and crowdfunding investment ventures imply the same thing – multiple investors pooling together resources to buy a property.
True, so far.
Nevertheless, real estate syndicates generally set their sights on larger investments – big commercial properties, entire apartment complexes, massive development plots, etc.
In the crowdfunded real estate model, the investments are often smaller. People could get together to invest in a duplex, perhaps a small commercial store, restaurants, and other properties of that nature.
Crowdfunding is extremely popular because everyone can participate – if they meet the minimum investment requirements. For example, financing a movie can have multiple tiers of investment. One investor can contribute $500, and another upwards of $20,000.
The same principal applies in crowdfunding. Real estate deals may have a minimum investment sum but not a maximum. Accordingly, a crowdfunding effort can result in dozens if not hundreds of people getting in on the same deal.
A real estate syndicate is a much smaller partnership. It typically consists of a handful investors, each contributing the same amount.
The sponsor is either the individual or the company that puts together the deal and raises capital.
With syndication, the sponsor can receive a sweat equity stake in the property while also picking up a preferred return, commissions on finding and closing the deal, as well as management fees. In crowdfunding, the platforms behind the deal mostly make money through various processing fees.
Another misconception is that syndication is similar, if not the same, with a REIT. The term REIT stands for a real estate investment trust. That trust is a company that finances, operates, and owns various income-generating properties.
That said, a REIT has more in common with a mutual fund. The company raises capital from various investors for their property deals. In return, investors own a stake in the REIT, not the properties themselves.
Money is returned to investors in the form of dividends, monthly or quarterly, taken from the company’s profits. It’s worth pointing out that REITs are very liquid, which is part of their appeal.
However, a REIT doesn’t give investors a say in what properties they buy, or how to manage them, or what rent to charge tenants.
As such, a real estate syndicate gives passive investors more direct control over the property. REIT shareholders have voting rights within the company but no control over the buildings it holds.
Most syndicators don’t know how to find investors for real estate investment opportunities. That’s why crowdfunding is a popular method of connecting with accredited investors and other would-be backers. These individuals visit many crowdfunding platforms specifically operating in the real estate niche because of the opportunities they can find.
Most crowdfunding platforms work by listing various types of properties, and investors can take their pick – depending on budget, preferences, capital, location, and other factors.
Investors who put most of their money into stocks and bonds often get to the point where they start thinking about minimizing risk. The best way to do that is usually through diversification.
But as previously mentioned, direct ownership in real estate is not for everyone. Even the smallest studio units can be outside an investor’s reach. Especially when you consider that most people aren’t even homeowners.
Thus, investors with small or moderate amounts of capital turn to real estate crowdfunding platforms to scout profitable opportunities that fit their budget and put their money to work for them.
Even wealthy investors may prefer to see what a crowdfunding platform can offer. Direct ownership might not be a problem. But being a wealthy investor doesn’t mean that the individual has the skills and experience to manage property assets. For that, they would need a general partner who can handle the management, maintenance, and raising of capital. Such a thing is easily accomplished when opting for a partnership-driven real estate investment strategy.
The benefit of multiple investors pooling resources to get in on the same deal is that they gain access to larger investment opportunities. Traditionally, bigger properties also mean higher rents and a better return on investment.
One of the most significant upsides of investing in real estate is control. Investors, even passive ones, usually get a say as to what happens to the property. This is more than they can do regarding stocks, bonds, index funds, etc. Although forming a real estate syndicate implies less control over the property compared to direct ownership, passive investors still get voting rights.
Transparency also gets some points here. Most crowdfunding efforts, regardless of the industry, tend to be very transparent with potential investors. When sponsors or syndicators try to raise the capital they need, they should aim to give accredited investors as much information as possible.
This appeals to interested investors because they can make more informed decisions based on their goals and the deal’s risk profile.
Another aspect worth considering is accessibility. When you talk about investing in real estate in general, there are only three real options:
Stocks are easily the most accessible form of real estate investment. Direct ownership is often preferred, but it’s expensive. That leaves passive ownership through syndication, which does a bit of both – it rewards investors with equity, a share of the profits, control over when to raise the rent, sell, etc.
Simultaneously, syndication is great for diversification. Individual investors rarely buy both residential and commercial buildings, let alone industrial or agricultural real estate. By pooling together resources, investors can access those property market sectors and diversify their investment portfolios with multiple assets – assets they’ve chosen from a pool of deal proposals.
Hence, a crowdfunding platform is preferred as it can bring together like-minded passive investors who want a broad range of opportunities and are unlikely to butt heads when it comes to making decisions.
There’s no simple answer to this question.
Real estate syndication and real estate crowdfunding are not directly synonymous as real estate investment models. Yet, the latter can serve as a medium for a real estate syndicate to find investors and make a deal.
To a sponsor, crowdfunding offers tons of opportunities to find any kind of investor or group of investors and buy income-generating properties.
If we’re specifically talking about returns, then syndication wins every single time. This partnership is highly appealing to passive investors with moderate to high capital. Thus, the partners can pool together impressive sums and go after high-yielding properties such as industrial real estate, large apartment buildings, entire retail centers, and so on.
On the other hand, opting for a crowdfunded real estate investment model may result in a better deal flow. With more and more people trying to diversify their assets through real estate, it’s easy enough to find dozens of smaller investors willing to loan or buy equity with as little as $500.
Although managing a crowdfunded model is more complex given all the different parties involved, it may be a faster way to buy several properties every couple of weeks. Smaller-sized properties and multiple investors will mean splitting the profits between many people. However, with enough properties bought, those returns can add up to a substantial cash flow.
It’s also worth pointing out that syndication doesn’t always require as much manpower as crowdfunded partnerships. A real estate syndicate may only have four members. But in a crowdfunded venture, the word crowd is self-explanatory. There’s a lot more to manage, even when automating several business management processes and operations.
In a syndicate-type partnership, things are often easier. Fewer members mean less work. Furthermore, the syndicator, sponsor, or general partner isn’t always a company. It can be an individual with the track record and skills to put together deals and raise capital.
Depending on your goals and expertise, one model might fit you better than the other. That said, syndication offers enough advantages that make it worth the extra effort.
Even when it comes to the legal aspect of forming an LLC or LP, meeting with a good real estate syndication lawyer once can clarify the entire process for you. As a result, you can continue putting together syndications, one after another, faster than you did previously.
There are only two, let’s say challenging, things about being a sponsor and creating a real estate syndication.
The job of a syndicator is much like that of the average real estate agent. You have to scout properties and find profitable opportunities. You have to negotiate favorable terms and work out how that property can make you money.
Then, you have to pair the property with the ideal buyer. Only in this case, you don’t have one buyer. Instead, you have multiple buyers as passive investors. On that note, this is where the similarities end.
When a syndicator scouts a property, they have to determine two things about it – how much money can it make in the present and five, six, or maybe 12 years down the road.
No real estate syndicate is created for life. The usual process goes like this – find and buy a property, manage it and earn profits from the rent, sell the property once it appreciates enough in value.
Therefore, a syndicator needs to do a bit more market research than a real estate agent. Agents have either buyers or sellers as clients. A syndicator’s partners are both buyers and sellers simultaneously. Plus, many real estate agents deal with homeowners who have highly specific needs. When addressing income-producing properties, there are other things to consider.
The most important job of a sponsor in a real estate syndication partnership is to do their due diligence and find great properties. From there, things get considerably easier – putting together the documents, negotiating, establishing the legal entity, and so forth.
But finding that ideal investment opportunity is the thing that matters most. Experience and talking a good game won’t impress investors. Research, forecasts, details, transparency, and potential are the things that convince investors to go in on these partnership deals.
The best way to find investors willing to form a real estate syndicate is by networking. Networking allows sponsors to form stronger, more personal relationships with people who have the capital to finance big deals.
Still, someone just starting out may lack those connections. While there’s time to build those, and each deal can open up new networking opportunities, you can’t dismiss good marketing.
A solid marketing strategy can put you in front of people. It can educate them on your vision, benefits of syndication, real estate market trends, potential returns and get would-be investors ready to answer when you come calling to raise funds.
Of course, crowdsourcing is another way to connect with investors, albeit usually with a smaller to moderate capital.
But one mistake that many sponsors make is that they don’t stay in constant contact with potential investors. Some reach out after putting together a deal and the only thing missing is the capital to make it happen.
Savvy investors need more. While they prefer to take a passive stance in the day-to-day operations involving the asset, they’re not satisfied by rushed or urgent capital raising ventures. They need time and plenty of information before making a decision.
As such, it’s a good idea to stay in touch with your network as you’re actively scouting properties. Keep potential investors apprised of your progress, opportunities, plans, and so on, as you go along. By the time you have to raise capital, you might’ve already done a lot of convincing.
Another benefit of using this strategy is that it will enable you to raise funds faster, close a deal, and quickly move towards putting together the next one. It will reduce the amount of time spent in between syndications, which should translate into more profits for you, and your network of investors.
There’s a lot of satisfaction to be gained from engaging in real estate syndication, forming partnerships, and going after high-income-generating properties. On the one hand, this type of investment can offer substantial rewards in the form of cash flow and a big chunk of additional profit after selling the property for more than its buying price (see our article on real estate syndication waterfalls).
On the other hand, syndication is professionally rewarding. Flipping homes and renting out one or two apartments can be lucrative. But it doesn’t offer the same sense of accomplishment as putting together a massive deal with a couple of other investors and seeing over 10% in annualized returns, not to mention the potential to gain an additional 20% or more after selling the property in a couple of years.
Although many syndications are structured to play the long game, this investment vehicle can also provide investors with impressive and realistic short-term gains. It’s one of the fastest ways for anyone involved in the real estate market, with little capital, to put together six or seven-figure deals and watch the cash roll in.
But remember – no partnership lasts forever. Establishing a solid reputation, making connections, marketing, and creating a consistent deal flow are essential for success in this part of the real estate sector.
Contact our syndication and private placement memorandum law firm today!