As a real estate investor, is it better to invest in a real estate syndication or a real estate fund? Both real estate syndication and funds are great investment vehicles that a new investor can use to venture into the field of real estate investment. But how do real estate syndications differ from funds? Which one should you invest in? In this guide, we are going to outline the difference between real estate syndication and fund models to help you make a better investment choice.
What is real estate syndication?
Syndication brings together multiple real estate investors to raise capital in one pool and invest in a single real estate opportunity. Syndicates always invest in one investment project at a time. Pooling capital from multiple investors makes it possible for real estate investors to invest in stable real estate projects that would otherwise be out of reach due to high capital requirements.
Every real estate deal involves two main players. There is the deal sponsor who identifies the investment opportunity and is responsible for successfully managing it and the investor who provides the required venture capital.
What is a real estate fund?
There are different types of real estate funds which can be broadly grouped into debt funds and equity funds. Debt funds are mostly issued by lenders to real estate investors who utilize the funds in improving their investment projects and then pay them back later with an interest.
In our context, we will focus on equity funds. With equity funds, the sponsor will raise money from investors and then go invest by acquiring multiple properties. The objective of equity funds is to buy multiple properties, improve them and sell them in the future at a higher profit.
Real estate syndication or funds? What are the factors to consider?
Considering the following factors can help you determine the best investment vehicle that will work for you.
- Length or the term of investment
Real estate syndications mostly have projected terms. The end date where the investment property is expected to be sold is estimated at 3-7 years. However, the end date can come early if the sponsor gets a great opportunity to sell and realize maximum returns.
For real estate funds, their terms are either closed or open-ended. Closed funds have definitive start dates but offer a range of end dates. Open funds on the other hand are recurring and don’t have definitive end dates.
- Liquidity
Syndication and close-ended funds have very low liquidity. On the other hand, open-ended funds have more liquid in the sense that they have flexible redemption periods where you can have the option of getting your investment back.
- The return structure
Both real estate funds and syndications have a similar return structure. Investors are paid what we call preferred returns and sometimes they enjoy a split of the profit as an addition to the preferred returns.
- The vetting process
For real estate syndication, the investor vets the deal by closely scrutinizing the deal sponsor and the real estate property in question. The success of any syndication is as good as the sponsor and the investment property.
Therefore, the sponsor history, investment experience, and property status can help you ascertain whether an investment is worth it or not. For real estate equity funds, the vetting process mostly focuses on the traits of the investment sponsor.
- Diversification
A real estate syndication involves investing in a single property. True diversification in syndication is only achieved if you invest in multiple syndication projects. Real estate equity funds enjoy diversification as investments are done in multiple properties.
- Tax implications
When you invest in real estate syndication, it becomes easier to file state tax returns because you are investing in one state. When you invest in the real estate funds, each equity fund has a different structure and you will need to file returns in different states if you invest in multiple assets. Syndications and funds provide tax benefits including depreciation which is pasted on to the investors.