What’s the better project to take on when looking to expand your property investment portfolio? Real estate syndication vs crowdfunding? It can be challenging telling these two investment strategies apart, especially if you’re new to real estate investment.
The former refers to the funding structure and relationship between the deal sponsor and investors. In contrast, crowdfunding describes the strategies sponsors employed to gain these investors.
Subsequent sections reveal information that can help you understand these strategies, providing you with everything you need to know to succeed in the $8.3 million industry.
Understanding Real Estate Syndication
What is real estate syndication, and how does it work? This financing process describes a business formation among a group of individuals who pool their resources together to take on a real estate investment thanks to the JOBS Act. Such a strategy helps improve these investors’ financial performance, creating a platform to participate in more significant deals than they could afford individually.
Here, a sponsor handles most of the active part of this arrangement; they’re responsible for identifying market opportunities, selecting the best investments, managing the property’s daily operations, and more.
Real estate syndication mainly provides you with the chance to take on more prominent real estate investments, but without the hassles of searching or overseeing one, more like a silent investor on a project.
What Is Real Estate Crowdfunding?
Many investors misunderstand the debate between real estate syndication vs crowdfunding to a large extent. They fail to understand the latter’s role as an umbrella term. Property crowdfunding describes a specific strategy of linking investors with a real estate syndicate.
The former uses a web-based platform to research and identify opportunities to fund real estate investments while playing a passive role. Imagine a GoFundMe, but on properties and with a chance at returns.
Individuals or companies that require funding to buy a property or start a venture set up a website or blog advertising their objectives. Crowdsourcing real estate investment offers sponsors the opportunity to avoid the challenges of securing loans while still gathering funds efficiently for their projects. Such a setup is open to public members to pool enough money to kick off a venture.
How It Works
A real estate syndication company buys, sells, and manages property investments. They create an avenue for investors with little to no knowledge of the market to skip the learning curve and avoid taking a high risk on their assets. Here’s an outline of their duties.
- Underwriting Deals
- Securing Financing
- Identifying Property
- Accessing Property
- Creating a Business Plan
- Performing Negotiations
- Finding Investors
- Managing Assets
In a crowdfunding project, three parties are usually involved; intermediaries, lenders, and borrowers. All groups benefit from this arrangement. Being the lender, the syndicator still contributes a sum to the investment pool, often within the range of five to 20 percent.
Investors receive their returns as the structure stipulates. If acting as an equity partner, they’ll share expenses and profits with the developer outlined in the deal terms. But as private loaners, they’ll receive their initial contribution along with a stipulated interest rate.
Benefits of Real Estate Syndications for Investors
Joining a property crowdfunding pool offers the following perks to investors.
- Minimal duties as a property owner
- High returns on investment despite minimal operating and administrative expenses
- A stable passive income
- Reduced inflation risks on assets
- A liquid tangible asset
- An opportunity to diversify their investment portfolio
Tips for Achieving Success as an Investor
After understanding the concept, many investors compared real estate syndication and crowdfunding. They arrived at the verdict that both are unique enough not to be interchangeable despite being real estate deals. When selecting a platform, here are tips to help you out.
Understand Its Forms
Typical forms of syndication in real estate include the following:
- Limited Liability Companies
- Full Partnerships
- Limited Partnerships
These structures define the role of all parties. Typically, the sponsor performs the property manager’s duties, while backers act as partnering sponsors.
Research Its Expertise
The managing team’s experience and skill set are crucial factors to consider when joining a real estate crowdfunding platform. Ideally, you’d want your sponsors to have a reputation for being successful with deep underwriting expertise. Having a prolific history improves their chances of identifying golden opportunities in the market.
Understand the Investor Types
When syndicators set up crowdfunding for real estate deals, they offer different investor types to the public. Understanding them can help you identify the risk, roles, and benefits of signing up for such a project. Here’s an overview of these variations.
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Secured Debt Investor
This setup offers the least risk for investors who want to join real estate syndications. It ties your investment to the asset as collateral, and you don’t gain property profits. More so, your return is limited to the fixed interest rate stipulated in the deal.
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Unsecured Debt Investor
Here, this setup ties your loan to the asset, and you aren’t entitled to property profits, with all returns coming from and limited to a stipulated flat interest rate.
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Preferred Equity Investor
If you enter into an investment project as a preferred equity investor, you become an LLC member. You’re among the first set to receive a share during profit distribution, with the percentage being proportional to your investment. There’s no cap on return. However, If the project goes under, you’ll receive no money.
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Simple Equity Investor
Investors are also shareholders as they become LLC members owning the assets in this arrangement. It comes with the highest percentage of gain, given the higher risk you’ll take on here.
It’s a No Cap on return arrangement. But you’ll receive any profit after the preferred equity investors in the project, and if the business goes under, you don’t get paid.
Key Takeaways
When comparing real estate syndication vs crowdfunding, it’s helpful to understand that the former is the latter’s strategy. Crowdfunding isn’t restricted to only property investments but extends to include other project funding.
It’s an excellent opportunity for entry investors to navigate the real estate market. Consider the reputation, perform your due diligence, and understand the syndication terms before signing up to one.
