Real Estate Syndications vs. Funds – Which Should You Invest In?
Real estate syndications and funds are two excellent entry points into the world of commercial real estate, but is one better than the other?
Depending on your skills, experience in the industry and amount of capital, there may be one that better suits your investment goals.
In this blog, we’ll go more in depth on these two real estate investment types and evaluate their pros and cons to give you a better understanding.
What is a Syndication?
We, at Excelsior Capital, are a syndication platform, meaning we acquire properties on a deal-by-deal basis, combining capital from multiple investors for each deal. This creates an opportunity for investors to obtain a larger, more stable asset than they could alone.
There’s a few main reasons one may opt for this type of investment:
- They’re looking to continue growing in the real estate space, beyond what they may be able to solely accomplish
For example, a property that might be a $10M raise could be attainable by pooling together capital from 10 investors that can contribute $1M of equity each (generating much larger buying power as a group).
- To have access to deal flow without the hassle of sourcing each opportunity themselves
The sponsor handles all initial due diligence and can source off market deals through their extensive brokerage network (*If you’re interested in learning how we, as a sponsor, source each of our deals, check out our blog post “3 Tips for Sourcing Commercial Real Estate Opportunities”).
- There’s little work required from the investor’s end; everything from day-to-day operations and property management to quarterly reports are all handled by the sponsor
How It Works
Each real estate syndication involves two parties: the sponsor and investor. The sponsor is responsible for sourcing each deal and handling all back-end operations throughout the life of the investment. Since the investor heavily relies on the sponsor, it’s extremely important for the sponsor to have years, if not decades, of experience in the industry.
It’s the sponsor’s responsibility to source each asset and provide their investors with the exact location of the property, information on the surrounding area and market environment, an overview of each tenant and all financials regarding the property. Once the investor chooses to place capital in the deal, there is very little required of them and they can enjoy the passive cash flow.
Like any investment, there’s the chance that something can go wrong, whether it be increased tenant vacancies or costly projects at the property. Luckily, if you choose a reliable sponsor, you will hardly ever experience the negative possibilities.
What is a Fund?
There are several types of funds, but a real estate fund is focused exclusively on investing in income-generating assets. From the surface, a fund sounds pretty similar to a syndication, but there are a few underlying factors that set the two apart. Contrary to a syndication, in a fund, the money is raised initially and then used to acquire multiple properties. Let’s look at a few advantages of investing in a fund:
- Funds create a much more diversified portfolio
Unlike a syndication, you aren’t investing in a single asset, so naturally funds are more diversified. Simultaneously, you’re lowering your risks by spreading capital across multiple assets.
- The structure is flexible
Typically, funds are structured as opened (ongoing) or closed (definite date). While closed funds are similar to syndications and give a time range of the length of the deal, open funds allow the investor to join, receive returns and withdraw, according to the sponsor’s terms; therefore, there’s a bit more flexibility with the length of commitment.
- Pooled Resources
Rather than going out and sourcing multiple properties yourself, a fund allows you to partner with other investors, while utilizing the resources and strategy provided by the fund managers.
How It Works
Real estate funds are led by experienced managers with a set investment strategy, while conducting all aspects of the fund’s performance. Similar to a syndication, investors will pool together capital, but instead of acquiring one single property, their capital will be spread across multiple assets. It’s also important to note that investors aren’t given insight into every property from the start. You can think of it more as a blind, or semi-blind, investment. The investor will be aware of the general types of properties the syndicator targets, but typically, will not know exactly which properties they’ll be investing in at the beginning. Because a majority of the power is in the hands of the sponsor, it’s important they have a proven track record and that their vision and strategy align with your own.
Now that you have a better idea of the two real estate investment types, you can see there are many overlapping benefits between syndications and funds. Whichever investment vehicle you choose, it’s crucial to trust and feel confident in your sponsor and their strategy.
If you have any questions or would like to speak with someone on our team about our investment opportunities, please don’t hesitate to reach out.
Will Crampton sailed across the Atlantic when he was 18, and then flew across the Pacific as an exchange student to China in 1986.
He led the acquisition efforts on behalf of investment groups for two Major League Baseball franchises and executed both the acquisition…
A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.
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