Investing in real estate is an attractive option for many investors looking to diversify their portfolios. Two of the most popular ways to invest in real estate are through real estate syndications and real estate funds. Both options allow investors to invest in real estate without having to purchase or manage properties themselves. However, real estate syndications and funds differ in several key ways. Read on to understand the differences between these two investment vehicles and determine which is the better choice for your investment goals.
Large-Scale Property Investments With Real Estate Funds
Real estate funds, like real estate investment trusts or REITs, private equity funds, and mutual funds, pool money from multiple investors to invest in real estate. The fund managers are responsible for deciding which properties to purchase and managing those properties. By investing in a fund, you are essentially investing in a diversified portfolio of properties. The key benefit of real estate funds is that they provide exposure to large-scale, professionally managed real estate investments that may otherwise be inaccessible to individual investors.
Drawbacks Of Lack Of Control And Transparency
The downside is that you have very little control or involvement in the investment decisions and management of the underlying properties. Real estate funds are also often less transparent than syndications. You rely heavily on the fund managers to make sound investment decisions and their performance and fee structure can be difficult to evaluate. Some funds may charge high management fees that cut into your returns. The large scale of many real estate funds also makes them more suitable for institutional investors and less ideal for small individual investors.
Hands-On Property Investing With Real Estate Syndications
Real estate syndication, on the other hand, is when a group of investors pools their funds to invest in a single property venture. Syndications are often organized as either private placements or crowdfunding offerings. In syndication, you have the opportunity to evaluate a specific property and its investment potential. If you invest in the syndication, you become an owner of that single property along with the other investors in the group.
More Control And Transparency
Compared to real estate funds, syndications typically offer investors more control and transparency. As part-owners of the property, investors can be actively involved in key decisions about acquisitions, financing, management, and dispositions. You have access to details about the property’s performance and expenses. The syndication’s success or failure depends entirely on the performance of that single property, so sponsors are strongly motivated to make sound investment decisions to keep investors satisfied.
Lower Costs But Higher Risks
Syndications also typically have lower fees than real estate funds. However, with a single property comes higher risk. If the property declines in value or experiences cash flow issues, your entire investment could be at risk. Real estate funds spread risk across multiple properties, so they are less vulnerable to problems with any single property. Syndications may also require long-term capital commitments, as it can take years to fully invest in, manage, and then sell a property.
Weighing the Pros and Cons
Whether you choose to invest in real estate syndications or funds depends on your investment preferences and risk tolerance. Real estate funds offer built-in diversification and professional management but less control and transparency. Real estate syndications, on the other hand, provide direct ownership and oversight of properties but expose you to higher risk. Many investors choose to invest in both options to balance these pros and cons.
To Wrap Up
If you prefer more hands-on involvement in investment decisions and a closer connection to the properties you own, real estate syndications could be a good fit. If, however, you would rather diversify across numerous professionally managed properties and don’t mind sacrificing some control, real estate funds may be the better choice for you. The key is evaluating which options match your financial goals and risk appetite. With the proper due diligence, both real estate syndications and funds can be attractive ways to add real estate to your investment portfolio.