Real Estate Syndications vs. Crowdfunding: Everything You Need To Know

More and more people today are investing in real estate syndications to make a profit on their savings so they can retire more comfortably! What is a real estate syndication? Many think it’s a form of real estate crowdfunding, but that’s not entirely accurate. Real estate crowdfunding is the process of attracting and engaging real estate investors to initiate the official syndication process.

Crowdfunding has become more popular recently, mainly due to the JOBS Act of 2012, which aimed to lessen regulations on small businesses and legalize equity crowdfunding. Since then, there have been more ways, especially through the Internet, for entrepreneurs and investors to find each other.

If you are considering investing in a syndication, continue reading to learn more about this investment strategy, including how to invest in one, and who you can trust within the crowdfunding craze.

As noted above, syndication and crowdfunding have been used interchangeably over the past decade. However, these two words are not directly synonymous. Syndications are funding relationships or arrangements between the investors. Crowdfunding is one way to find these investors.

Crowdfunding is a method for raising capital and engaging investors. It may be used for purposes beyond real estate syndications. For example, you may have heard of or donated to a GoFundMe account. This form of advertising and accepting quick cash would fall under the category of ‘crowdfunding.’ Companies or individuals seeking to pool financing to start a new business or purchase real estate may also crowdfund; they may create a blog or website to advertise their objectives and attract a ‘crowd’ of investors.

Syndications in real estate occur when you sign over your partial investment amount and agree to the terms and conditions that have been set by the project’s manager. You can then leave the rest of the decision-making to the project/investor manager, who will, hopefully, help you achieve your agreed-upon return on investment. Some of the big benefits of investing in syndications include (1) the ability to invest in a larger deal than you could do on your own, (2) you don’t have to manage the day-to-day details and procedures, and (3) at the same time, you can (potentially) make greater income than you could from a smaller solo investment.

Large project developers seeking a syndicate (a group of people pooling financing) may initially use crowdfunding. As an investor, you’ll want to do your due diligence before investing in a syndication. You should look for well-managed projects with strong potential for high returns. A give-and-take relationship is the incentive for making a syndicate deal. If you want to begin in this business venture, here are some details you will want to know:

There are two main divisions of investment deals. One division is equity partnerships, and the other is private loans. The equity partnership means that expenses and profits are shared between you and the developer as outlined in the offering documents. A private loan is when you lend money to a developer, who must repay you, typically at a fixed interest rate. You will decide which part of the deal you want to participate in. Your decision may vary from one syndication to another.

Syndication deals can be risky and complicated, like most real estate investments. To reduce complications, the group of equity investors will join a Limited Liability Company (LLC) that can better manage financial matters and project structure. There may be multiple LLCs that are entities of the master LLC, the sole owner of a Corporation. For example, RealWealth investors come together as an LLC entity, forming a syndicate with the corporate LLC involved with the project at hand. Crowdfunding happens at various levels, making syndicates possible for more groups of individuals.

Investors who participate in syndications are considered ‘passive’ because they are not the ones handling the project details. As a result, there are certain SEC regulations. For instance, Rule 506(c) governs syndications that require participants to have higher-income accreditation. These deals can be advertised openly, allowing the help of crowdfunding. However, under Rule 506(b), which permits up to 35 “sophisticated investors,” there is a prohibition on public advertising and discussing the deal openly. In this type of syndication project, developers may discuss the prospective syndication only with people they already know and have worked with. This rule seems to shun crowdfunding.

When you hear about a large real estate project from a reliable source, you will want to:

1. Obtain details on the project and future capital gains projections.
2. Verify credentials and experience of the real estate syndication/project managers. Kathy Fettke, Co-founder of RealWealth, suggests, “Make sure the manager has a lot of experience. Not someone who is doing it for the first time.”
3. Consult your personal accountant and/or tax advisor and decide what type of investor you will be, which is listed below.

• Secured debt investor: Your investment is tied to an asset as collateral. This is the least risky, but you don’t gain asset profits. Flat interest rate, and your return is capped at the interest rate.
• Unsecured debt investor: You offer a loan not tied to an asset. You gain from a flat interest rate that is capped, but don’t gain from asset profits.
• Preferred equity investor: You become a member of the LLC that owns the asset; therefore, you are a shareholder of the property. Preferred returns mean that if there are profits to distribute, you are the first to get a share that is proportionate to the amount you invested. No cap on return. However, if the asset goes under, you don’t get paid.
• Simple equity investor: You become a member of the LLC member that owns the asset; therefore, you are a shareholder of the property. You receive your share of profits after the preferred. No cap on return. You are entitled to a higher percentage of gains given the higher risks. However, if asset goes under, you don’t get paid.

Sound investment decision-making will come as you gather information and advice and decide on the type of investor you want to be.

There are many tactics used online to lure people into making purchases or believing in an idea. Be cautious as you venture into real estate syndication deals and don’t fall prey to the crowdfunding craze. Your due diligence will be imperative to avoid bad deals and recognize good ones. Best wishes in syndication investing!

To learn more about RealWealth’s current syndication opportunities, join RealWealth.