According to a comprehensive research study conducted by Facts & Factors, the global real estate crowdfunding market is estimated to reach $868,982 million by 2027.
Real estate has always been an investor favorite and the evolution of real estate syndication has made what was once a market only available to the ultra wealthy a possibility for many more people.
However, before jumping in, it’s essential to understand the basics of how real estate syndication works, the pros and cons of this type of investment and how to get started safely in ways that minimize risks.
What Does Syndication Mean in Real Estate?
Real estate syndication is a partnership with several investors who pool their capital and skills to purchase and manage property. It was a precursor to real estate crowdfunding and now these terms often get used interchangeably.
Technically, syndications are considered a type of partnership between people in investment deals, while crowdfunding is a strategy for securing money.
In terms of real estate, both involve pooling money to purchase physical buildings like apartment buildings, single family housing, commercial real estate and more.
Real estate syndications exist for both residential and commercial properties. Fundrise is known as the first company to crowdfund real estate investments successfully and they focus mainly on residential projects.
They use a “value investing” technique to purchase assets for less than they believe the intrinsic value to be and then work diligently to appreciate the asset’s value so investors make as much money as possible.
- Regardless of your net worth, you can now benefit from real estate’s unique potential for generating consistent cash flow and long-term gains with Fundrise starting as low as $10.
- Enjoy set-it-and-forget-it managed portfolios with standard Fundrise accounts, or actively select the funds you want to invest in with Fundrise Pro.
- Diversify your portfolio with real estate, private tech investing, or private credit.
- Low minimum investment ($10)
- Accredited and non-accredited investors welcome
- IRA accounts available
- Highly illiquid investment
Comparatively, EquityMultiple focuses almost exclusively on commercial real estate. Their property types include (but aren’t limited to):
- Office
- Retail
- Storage
- Industrial
- Multifamily
- Car Wash
- Cannabis Facilities
- Opportunity Zones (tax-advantaged)
- Senior Living Facilities
- Student Housing
- Data Centers
- Mixed-use
EquityMultiple’s experts select only 5% of the investments evaluated. They prioritize working with quality real estate firms and carefully assess each individual asset.
- EquityMultiple is a commercial real estate platform for accredited investors, providing investment opportunities in real estate funds, individual properties, and savings alternatives.
- EquityMultiple has a team boasting decades of real estate transaction experience. Their due diligence process whittles down a large selection of properties, accepting only 5% as target investments that they use to build a variety of portfolios that suit numerous investing objectives.
- The company has made $379 million in distributions since its founding.
- Makes commercial real estate Investments accessible
- Intuitive website design
- High net total returns and distributions paid to investors
- Only available to accredited investors
- High investment minimum to begin
- Fee structure varies by investment, complex at times
Related: Best Video Intercom Systems for Apartments and Office Buildings
How Does Real Estate Syndication Work?
Real estate syndication spreads out investors’ risk and takes away a substantial amount of responsibility.
For example, pretend you’ve set aside $50,000 to invest in real estate. One option would be to put a down payment on a single rental property and rent it out to one tenant.
Your risk and reward all depend on how that home appreciates and how reliable your tenant is at paying rent. You have full control and the responsibility that goes with it.
Another option would be to put your money into real estate investment trusts (REITs).
REITs are simple to purchase on free trading apps like M1 Finance and take away the management responsibilities that come with buying your own property.
However, in terms of overall profit, real estate syndication may be your best choice.
Rather than investing your $50,000 in just one property, you could invest in five commercial real estate projects chosen by professionals through a platform like EquityMultiple.
These projects include different property types and risk/return profiles so your profile is diverse and your risk reduced.
All syndication agreements need somebody to work as the “syndicator” or “sponsor.” This person or company has the responsibility of finding, purchasing, and managing the real estate.
It’s a job for real estate experts and not beginners. It’s standard for the sponsor to earn a one-time acquisition fee (usually 1-3% of the property purchase price) and a portion of the ownership (regardless of whether they contributed any money).
While this may seem like a great deal, the sponsor must be skilled in active asset management, reporting and accounting.
The other people involved are the investors. Each investor contributes money to own a percentage of the real estate. They have the benefits of property ownership without all the responsibilities of the syndicator.
Once expenses are paid, investors receive payments from property operations, usually quarterly, making these income-generating assets.
Later, if the property sells, investors get a portion of the proceeds proportionate to the percentage of the property they owned.
Sometimes a Joint Venture (JV)/Equity partner works as an intermediary between the sponsor and the investor.
Why Do People Engage in Real Estate Syndication?
Real estate syndication maintains the benefits that come with real estate investments in general. Real estate is a great way to diversify an investment portfolio because it hedges against inflation.
Your investment carries tax advantages like MACRS depreciation and Section 1231 property treatment (if the property meets certain criteria) and you won’t pay taxes until selling the property.
One of the main reasons people engage in real estate syndication is that the heavy lifting is done for you. Rather than researching hundreds of properties, obtaining the ones you think will succeed, and then managing those properties, you can just sign up for a real estate syndication platform.
After you’ve done your due diligence, the sponsor becomes responsible for all the ongoing work, while you just sit back and enjoy your passive income stream.
In addition to the simplicity, real estate syndication can provide large investment opportunities that most individuals couldn’t afford independently.
These larger investments tend to be more lucrative than smaller ones.
Even non-accredited investors can participate in real estate crowdfunding platforms like Fundrise or DiversyFund, with few limitations.
Related: Is Paying Cash for a Rental Property a Good Idea?
Is Investing in Real Estate Syndications a Good Idea?
There are a couple of downsides to investing in real estate syndications. These alternative investment options are highly illiquid. If you have an agreement where the asset purchased will be held for five years, you can’t easily pull your money out earlier.
Depending on who you team up with, the minimum investments can also be very high. Having a high amount of funds illiquid for several years isn’t an option for everybody.
It’s also essential you work with a trusted syndication sponsor. If you take a risk on somebody new to syndication, you drastically increase your risk and profits may suffer.
While it’s tempting to work with friends or family you trust, this only works if the person who will be the sponsor has substantial real estate knowledge.
Fortunately, you can avoid these downsides. Before putting money into a real estate syndication, make sure you either have an emergency fund or that your other investments are liquid, such as stocks.
If you have other money to fall back on, the illiquidity of real estate syndications matters less. Minimum investment levels vary and, depending on who you work with, it’s possible to get started with much less money than others require.
Finally, working with established crowdfunded real estate platforms can help ensure your assets are bought by real estate experts.
How Can I Start Investing in Real Estate Syndications?
It’s essential you carefully choose which real estate syndication will receive your capital. Many syndications are offered through private placements.
If you go this route, make sure there is a detailed memorandum you can read that describes the project, how proceeds will be distributed, financial projections and associated risks.
Learn the background of the sponsor and what their track record is for managing similar investments. The sponsor should have a positive reputation in the real estate community.
Rather than a private placement, you may be better off investing with a crowdfunding company, such as Fundrise. This company is ideal for beginner real estate investors as you can get started with as little as $10.
Fundrise will create your customized portfolio that aligns with your investment goals and you can read transparent updates on construction progress, project completions, and more, at any time. It just takes answering a few questions to get started and no accreditation is required.
- Regardless of your net worth, you can now benefit from real estate’s unique potential for generating consistent cash flow and long-term gains with Fundrise starting as low as $10.
- Enjoy set-it-and-forget-it managed portfolios with standard Fundrise accounts, or actively select the funds you want to invest in with Fundrise Pro.
- Diversify your portfolio with real estate, private tech investing, or private credit.
- Low minimum investment ($10)
- Accredited and non-accredited investors welcome
- IRA accounts available
- Highly illiquid investment
Related: 11 Best Fundrise Alternatives [Accredited & Non-Accredited Apps]
The barrier to entry is a bit higher to join EquityMultiple, but if you qualify it can be worth it because of the access to lucrative commercial real estate properties. Investing is only open to accredited investors and the minimum investment is $5,000.
After you’ve signed up and proven you qualify, you can link a checking account. From there, you can choose to invest in any of the live offerings listed. Decide how much you want to invest, reserve your spot and sign the appropriate documents.
- EquityMultiple is a commercial real estate platform for accredited investors, providing investment opportunities in real estate funds, individual properties, and savings alternatives.
- EquityMultiple has a team boasting decades of real estate transaction experience. Their due diligence process whittles down a large selection of properties, accepting only 5% as target investments that they use to build a variety of portfolios that suit numerous investing objectives.
- The company has made $379 million in distributions since its founding.
- Makes commercial real estate Investments accessible
- Intuitive website design
- High net total returns and distributions paid to investors
- Only available to accredited investors
- High investment minimum to begin
- Fee structure varies by investment, complex at times
Final Thoughts on Real Estate Syndication
Real estate is a top method for diversifying one’s investment portfolio and it can be highly profitable. Choosing the real estate syndication path for investments can reduce your risk and responsibility.
It can also give you access to properties you may not be able to afford on your own. Just remember to do your due diligence when deciding who to trust with your money. The more active you are when picking an investment, the more passive income you can receive.
