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

Real Estate Syndications vs Crowdfunding Everything You Need to Know [Free Investor Guide]

Summary: In this article you will learn how real estate crowdfunding has expanded syndications and opened the way for more people to make a profit from real estate.

Introduction

More and more people today are investing in real estate syndications as a way to make a profit on their savings, so they can retire more comfortably! What is a syndication? Many think it’s a type of real estate crowdfunding, but this isn’t entirely the case. Real estate crowdfunding is actually a general term for attracting and finding real estate investors in order to begin the official process of syndication. Crowdfunding has become more popular recently, largely 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.

Are you considering investing in a syndication? Continue reading to learn more about this investment strategy, how to invest in one, and who you can trust within the crowdfunding craze.


Syndications vs. Crowdfunding

As mentioned above, syndication and crowdfunding are terms that have been used interchangeably within the last decade. However, these two words are not directly synonymous. Syndications are funding relationships or arrangements between the investors. Crowdfunding is one method of finding these investors.

What is real estate crowdfunding?

Crowdfunding is a method of finding and engaging investors. It may be used for many purposes other than 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 out others to pool together financing to start up a new business or purchase real estate may also crowdfund – they may create a blog or website where they advertise their objectives in hopes to gather a ‘crowd’ of investors.

What is a real estate syndication?

Syndications in real estate occur when you sign over your partial investment amount and agree to the terms and conditions that that have been set by the project’s manager. You can then leave the rest of decision making to the project/investor manager who will, hopefully, help you get 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.


3 Things To Know Before Investing in Real Estate Syndicates

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

1 – Deal Structure

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

2 – Become a LLC Member

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) who can better manage financial matters and project structure. There may be multiple LLCs that are entities to 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 to more groups of individuals.

3 – Securities and Exchange Commission (SEC) Regulations

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


Important Syndication Tips & Strategies for Success

How To Do Due Diligence

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

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

Understand Investor Types

  • Secured debt investor – Your investment is tied to 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 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 means 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 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 upon a type of investor you want to be.


Conclusion

There are so many tactics used on the internet to lure people to make purchases or to believe in an idea. Be cautious as you venture into syndication deals and don’t fall prey to the crowdfunding craze. Your due diligence will be imperative to stave off bad deals and to be able to recognize good ones. Best wishes in syndication investing!

To learn more about RealWealth’s current syndication opportunities, click here. 🙂


Sources:
1- How to Invest in Syndications Like a Pro- RealWealth Webinar
2- Crowdfunding vs. Syndications- Crowdfunding Lawyers
3- The History of Crowdfunding- Fundable

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