Real Estate Syndication vs Funds: Which to Invest in

When it comes to investment, real estate syndications and funds are two excellent ways to get started in the world of commercial real estate. The big question though, that you’re going to come across often is whether one is better than the other. It really depends on your skills, your experience in the industry and the amount of capital that you have. But there may be one option that better suits your investment goals compared to the other. Let’s deep dive onto both of these real estate syndication and funds to determine which of the two real estate investment types is best for you.

What is a Syndication?

A syndication is a platform of investors who acquire properties on a deal by deal basis. They combine their capital from multiple investments from each of the deals and it creates an opportunity for an investor to obtain a more stable asset than they could by themselves. Understanding how syndication funding works is vital if you want it to work for you. There are lots of reasons that somebody may opt for this type of investment over funds, and those include the following:

  • Continue to grow in the real estate space.
  • They want to have access to deal flow without having to source every opportunity by themselves.
  • There’s not much work required from the investors’ end. Everything from the day-to-day operations to property management to quarterly reports are handled by a sponsor that’s been nominated. 

How It Works

It works in the way that each real estate syndication involves two people, the sponsor and the investor. The sponsor sources every deal and handles all of the back end operations from the beginning to the end of the investment. The investor relies on the sponsor, so it’s important for the sponsor to have as much experience as possible before you get involved.

Your sponsor has to source every asset and provide their investors with the exact location of the property, the information that’s needed on the surrounding area and the market, and an overview of the tenant and the financials that are involved. Once the investor chooses to put capital into the deal, they don’t have to do much more. Just enjoy the passive cash that comes their way. Of course, as with any investment, there is always a chance that something can go wrong, but. It’s important to have an important and reliable sponsor in this case, because then you’ll never really experience the negatives.

What is a Fund?

There are many different types of funds, but a real estate fund differs because it’s focused exclusively on assets that are income generating. A fund sounds pretty similar to syndication on the surface, but there are some underlying factors that do set the two of them apart. In a fund the money is raised initially and then used to acquire multiple properties which is contrary to a syndication. You would choose a fund if you want to benefit from the following advantages:

  • You’re looking for a more diversified portfolio.
  • You want to lower your risks by spreading capital across multiple assets.
  • You’re looking for a flexible structure.
  • You want to pull resources. A fund allows you to partner with other investors.

How It Works

Real estate funds are not led by sponsors, but by managers with a set investment strategy. Similar to a syndication, investors put together their money and their capital, but instead of acquiring one single property, the capital is spread across multiple assets. This allows you to have multiple fingers in multiple pies.

Investors are not given insight into every property from the start in the same way they are syndicated. It’s like a blind investment. You are trusting that the money is going to the right places. A majority of the power is in the hands of the sponsor here and it’s important that they have a proven track record that the vision and strategy is going to align with your own.

Understanding the two different real estate investment types, you can see that there are benefits that overlap between syndications and funds so that you can make a more informed decision. Whichever investment you choose to use, it’s crucial to feel confident in your sponsor, in their strategy and where your money is going to go. Now that you know which is which, what are  you planning to do with your next investment? Let us know in the comments.