Real estate investors can choose between numerous strategies. Among those include real estate syndications and funds, which are excellent entry points for beginners. You can take advantage of rental income and possible capital appreciation.
A real estate syndication is a type of investment vehicle that allows investors to pool their money with others to purchase properties. The properties are then managed by a professional real estate management company and leased out to tenants, who will pay rent to cover the costs associated with owning the property. The investor receives monthly tenant payments and can either accept them directly or reinvest them into other investments.
With a real estate syndication, you and other investors can pool your money to purchase large-scale projects. Think about skyscraper buildings, luxury apartments, and hotels.
What is Real Estate Syndication?
Real estate syndications are a way to pool money together to buy property. The process is pretty straightforward—a group of investors signs on and starts making offers while an industry professional helps coordinate the process. In exchange for their investment, they get a share of the profits from each deal and some collateral assets (like mortgage notes).
Syndicators have been around for decades and have become increasingly popular in recent years. As such, real estate syndication has grown rapidly into an industry with billions of dollars in annual transactions across multiple asset classes.
One or more individuals sponsor syndicators. These sponsors lead the project, choose the suitable building and plan the renovations. From there, these sponsors will raise funds for this project by “selling” LLC shares to investors. As owners/partners of the LLC, these investors own a proportionate share of the building. They are entitled to their portion of profits.
Purpose/Funding
Syndication is an investment vehicle used to purchase real estate. The process involves a pool of investors who pool their resources to buy the property through a third party, such as a developer or property management company. The investor then takes on the role of managing the property’s operations and collecting rent payments from tenants.
Funding comes from investors who fund these projects, usually through their savings or retirement funds. Professional managers manage these funds and ensure they adhere to strict investment policies set by regulatory authorities like FINRA (Financial Industry Regulatory Authority) and SEC (Securities Exchange Commission).
Fees/Syndication
The fees associated with real estate syndications are generally higher than those of funds. They can range from 2% to 5% of the total amount raised. This is because you’re paying a manager to help structure your deal, which requires more work than simply pooling money and buying properties. The manager is usually from a real estate company with experience in this area and knows how to get the best deals for investors.
As an investor, you’ll need to decide if the higher fees are worth it—or if you’re better off just going solo or investing in funds instead. Real estate syndication investment is excellent for diversifying your portfolio, enhancing liquidity, and having a steady cash flow.
One of the benefits of syndication is that it makes investing in real estate easier by eliminating the need for complicated legal agreements and other financial arrangements. With the help of a syndication agent, you can invest in real estate without having to worry about legal and financial issues.
When you invest in real estate syndication, the returns are quoted as an annual percentage rate. In addition, capital gains distributions are generally tax-free, while interest and dividend income is taxed as ordinary income. The tax rate for capital gains is also lower than the income tax rate.
Real estate syndication has a lower risk than private real estate funds. You won’t need to sell your shares when real estate values fall, so your investment is protected from loss. The benefits of real estate syndication are its long-term nature, the predictable returns, and the tax benefits associated with it – they are a much better choice than investing in private real estate funds.
What is a fund?
Real estate funds are designed to invest in income-generating real estate assets. A real estate fund differs from a syndication in that capital is raised initially and then used to acquire multiple properties. Like other mutual funds, real estate mutual funds can be either actively or passively managed. The latter typically tracks the performance of a benchmark index.
Funds are much less risky than syndication, as you’re not putting all your eggs into one basket. You’re creating a much more diversified portfolio by spreading capital across multiple assets. Funds are categorized as open (ongoing) and closed (defined date)
Open funds give investors more flexibility, allowing them to join and withdraw according to the sponsor’s terms. Meanwhile, closed funds are similar to syndications, which provide a time range for the length of the deal.
Since it’s often structured to return profits to investors before the fund’s sponsor earns any profit, sponsors align their interests with their investors. This means sponsors are motivated to meet the target profit.
Real estate enables investors to reap passive income. But landlords must actively manage the properties they own. On the other hand, real estate funds are much more hands-off investments since others handle active management of the properties.
Real Estate Syndications vs. Funds: Where should you invest?
Investing in real estate can be a great way to provide for your long-term financial needs while providing both growth and stability for your money over time. However, the choice ultimately depends on several factors, including your financial situation, financial goals, and current tax situation.
If you have any questions about Real Estate Syndications vs. Funds, you may contact us here:
Email: invest@dreamvesting.co
Phone: 402-616-0019
