In this post we will investigate why real estate syndications get a bad rap – and why they are looked at differently from real estate funds (and some of the myths that come with that). For those that don’t know, real estate funds – which tend to be significantly larger than syndications – pool capital from many investors, and then the fund’s sponsor will invest in properties that fall under the investment thesis of such fund. Syndications also pool money from multiple investors for the purpose of investing in a specific real estate opportunity.
At the end, both forms of real estate investing allow investors to passively invest while reaping tax benefits and growing their personal wealth in the real estate investment space.
Myth 1 – Syndications can take longer than Real Estate Funds
Syndications typically have investment periods that range from 3-5 years depending on the actual investment and the sponsor. The exact date is ultimately up to the discretion of the sponsor who is operating the deal. The actual syndication investment will describe the targeted period not as a range but as a finite amount of time.
Closed real estate funds have a definitive start date and the end date is given as a range. This is usually exited when the last property in the fund is sold. Fundraising for these funds take longer than syndications and can span over a couple of years, hence why your money is typically tied up longer, many times close to ten years.
Either way, one should always review these periods before deciding to invest in the former or latter.
Myth 2 – Real Estate Funds are less risky than Syndications.
Real Estate Funds are considered to be more diverse and less risky as the money is pooled and invested over multiple properties and in some cases asset classes within the real estate fund. As much as that is more diverse, you do not get to vet the actual properties, locations and demographics so there’s a lot of “blind” faith put into the sponsor.
On the other hand, syndications will allow for investors to take a close look at the sponsor and the property. One will have a chance to review the deal, track history, location, demographics and make a sounder decision on your investment. The diversification is less as they’re usually more concentrated into one or two properties and geographically.
At the end, both have their own risks associated and not one is risky than the others. It all comes down to your risk appetite at the given time of investment.
Myth 3 – Real Estate Funds tax benefits are same as Syndications
Both Syndications and Funds offer tax benefits such as depreciation or write-offs and pass them along to investors. Investors need to realize, when you’re investing in a syndication, you will only have to file the state tax return for that specific investment. The issue that comes to light is when investing in a fund, you may have invested in multiple states all over the United States, which means a bunch more state tax returns to file. Although depreciations are passed through, it may not be the same losses for one state versus the other depending on the stages of those investments within real estate funds. Couple that with the time of the real estate funds, you’re going to be filing in multiple states over the span of 7-10 years versus with syndications in one state over 3 years.
Syndications allow you to better forecast what states you’ll be filing your returns and how depreciation will work over the 3 years to help offset other gains you anticipate in those coming years.
Both can be great vehicles of generating passive income through real estate. However, their differences are enough that you should weigh the pros and cons of each. At the end, whichever mode you choose, it all comes down to proper due diligence in the sponsors, investment thesis, terms and tax implications.
Overall, when it comes down to it – both types of investments are real estate based and carry high risks. Regardless of which you choose – always diversify your investments, and in the real estate world you are always investing in the sponsor, not the investment. Some deals may always go poorly in a bad market – regardless of the sponsor, but often experienced managers select better investments and can navigate more efficiently when things don’t go as planned.