Choosing Syndications v Real Estate Funds

January 12, 2023

This is a question that comes up often when we speak with new investors. Which type of investment is better, and why are your offerings mostly project specific syndications?

To start, real estate syndications are private offerings that pool capital from multiple investors to invest in a single real estate opportunity. Syndications have a sponsor that manages the project —plans out the project and executes the plan – after which capital is returned to investors with gains or profits. Real estate funds are where capital is invested with a manager who created an investment strategy and will use this guide to handle all aspects of the fund’s performance – but the investor will not know what – or where – the investments may be. By investing in a real estate fund, investors can diversify holdings between different markets and property classes.

  1. The cost to invest

This metric will vary greatly depending on the sponsor, but traditionally real estate funds charge the investor a fee of 1 to 2% for each year the capital is invested in the fund. With a syndicate, or the way we do it at Mortar – there is no asset management fee charged to the investor. In a syndication, the sponsor’s fee is paid from the project revenue. So, for example is an investor contributes $100,000 to a real estate fund that charges 1% annually for asset management – after 5 years they will receive back $95,000, plus any gains. In a syndication, since there are no fees charged to investors – at the end of the project the investor will receive back their $100,000 in whole – plus any gains or profits.

  1. The tax benefits are not equal

Real estate syndications can have tax benefits over a fund.  A syndication’s income and depreciation pass through to the investor’s tax return, and an investor can be more strategic – and choose a particular project to offset other gains or defer taxes since they know the project deals in advance.

In addition, when you invest in syndication, state tax returns are typically easier as you are only investing in one property in one state. If you’re not a resident of that state, you’ll typically have to file tax returns both in your home state and the state where the investment is located. When you invest in a fund, you may be investing in multiple states which will require multiple state filings.

  1. When do I get my money back

In a real estate fund, an investor’s capital is typically invested over terms that range from 5 to 10 years. With a syndication, each company is different, but offerings at Mortar take about 30 months in total. This 30-month period begins when an investor commits to the offering, and ends when the equity investment is paid back to the investor plus any gains. This shorter time frame is alluring to some investors who want to plan to get their money back after only 2 to 3 years instead of the traditional 5 to 10 years.

  1. Control

Many real estate funds are also blind or semi-blind pool funds, in which the investor must commit capital to the sponsor prior to knowing what assets the fund will buy or invest in. In a syndication, the investor usually knows the project details and location, so they can do their homework on the specific deal to be purchased.

  1. Due Diligence

Due to the nature of a syndication offering, the investor will be able to do more due diligence before diving into an investment. Prior to committing to a syndication, an investor is able to identify a specific property, evaluate the market where the property is located, understand the expenses and pro-forma and review sales and market comps. In a blind fund structure, investors will not have access to the specifics of a deal before hand and are investing in the capabilities of the sponsor and management team.

When you invest in a real estate fund or syndication, you’re getting many of the benefits of real estate without needing to manage it actively. Whatever investment vehicle you choose, both are fantastic ways to create passive income, and start investing in real estate with a modest time commitment.

However, their differences are enough that you should weigh the pros and cons of each. Ultimately, it comes down to the sponsor on any deal, and doing your due diligence to properly vet the management team is important, as well as making sure you work with an experienced sponsor.