Compare Individual Syndication vs Private Equity Fund

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Compare Individual Syndication vs Private Equity Fund

Duke Giordano
Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes

Hello All,

Thanks in advance for your comments. I am a high income W2 earner looking to start a passive income RE portfolio in the near future and trying to narrow down its composition between Syndications and PE Funds.  A large component of what I am looking to do is both passive income, but as to not try to increase my taxable income so although taxes are not the sole reason they are a big component of the selection below.  I am prepared to, and have been doing initial due diligence on sponsors and funds, but not looking to have any day to day role or liability (turn key is out).  As I am in the process of vetting a number of syndication sponsors and also fund managers and I am trying to get a good read for the sake of comparison between Individual real estate syndication deals vs RE Private equity fund (such as Broadstone, MLG, Grub, Origin etc).  The plan is to deploy several hundred thousand in capitol (from a post tax brokerage account) split up across 5 investments or so to start for the sake of both Diversity and possible Passive pairing to help with taxes (Ex one may give more losses and other more passive income and thus offset).  I am mainly looking at equity deals since this is a post-tax brokerage account but would be open to other deals if appropriate such as debt.  Specifically I am looking to compare:

1. Minimums (seems like some funds have higher minimums vs Indiv Syndications)

2. Hold Time and tax implications (most syndications seem 5 yrs vs Funds in the 7-10 year range)

3. Return (overall return as either Preferred vs IRR (Many syndication with a Pref 8% vs Funds some 6%)

4. Depreciation - Does one have an advantage over the other from a Depreciation/losses standpoint?  Ability for cost-segregation/bonus depreciation?

5. Exit/Exchange at end of term: I believe you can do a 1031 with individual syndicator but some funds allow something called a 721 exchange to also transfer into a new fund without a capitol gain realized.

6.  Taking above into consideration what is some passive pairing options/thoughts to offset one another (such as two funds that give off more income considered passive and 3 syndications that depreciation/losses to offset for 5 total).

Thanks in advance

Duke

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y

@Duke Giordano I think you outlined the main issues very well.  The one point you left off is that many of these funds simply invest the money they raise with other operators by doing a joint venture.  This means that in the end you are just investing in the same syndication, but through a middleman who is raking some of the cash flow before it filters down to you. This is called a dual promote, and there is also a dual layer of fees because the operator has their fees, and after that, the fund has theirs. You cut out the middleman by investing directly in the individual syndications.

This isn’t always the case, however.  Some funds are sponsored by operators who purchase and operate properties directly.  In this case, you eliminate the dual promote and gain the advantage of splitting your risk among several assets, as opposed to a single asset as is typically the case with an individual syndication. The downside is that you don’t have the luxury of choosing which assets you invest in.  Those decisions are made by the sponsors.  

And some funds do both—acquire assets directly and invest in other sponsor’s deals.  There is some dual promote and dual fee here.

Aside from those nuances, the two options are very similar as far as depreciation and tax treatment.  Minimums and hold times vary widely so that’s simply a matter of comparing the various options out there.

As far as return, if I were you I’d disregard that as a criteria entirely.  You just can’t compare a fund with a syndication.  A projected return is just that—a projection.  It’s only as good as the assumptions made in the projection.  With a syndication, you can study those assumptions and evaluate the likelihood of them being achieved.  With a fund, you have no assumptions to underwrite other than any assets that the fund might already own. You have no visibility into the assumptions made on future assets.

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    7y

    @Duke Giordano I think you outlined the main issues very well.  The one point you left off is that many of these funds simply invest the money they raise with other operators by doing a joint venture.  This means that in the end you are just investing in the same syndication, but through a middleman who is raking some of the cash flow before it filters down to you. This is called a dual promote, and there is also a dual layer of fees because the operator has their fees, and after that, the fund has theirs. You cut out the middleman by investing directly in the individual syndications.

    This isn’t always the case, however.  Some funds are sponsored by operators who purchase and operate properties directly.  In this case, you eliminate the dual promote and gain the advantage of splitting your risk among several assets, as opposed to a single asset as is typically the case with an individual syndication. The downside is that you don’t have the luxury of choosing which assets you invest in.  Those decisions are made by the sponsors.  

    And some funds do both—acquire assets directly and invest in other sponsor’s deals.  There is some dual promote and dual fee here.

    Aside from those nuances, the two options are very similar as far as depreciation and tax treatment.  Minimums and hold times vary widely so that’s simply a matter of comparing the various options out there.

    As far as return, if I were you I’d disregard that as a criteria entirely.  You just can’t compare a fund with a syndication.  A projected return is just that—a projection.  It’s only as good as the assumptions made in the projection.  With a syndication, you can study those assumptions and evaluate the likelihood of them being achieved.  With a fund, you have no assumptions to underwrite other than any assets that the fund might already own. You have no visibility into the assumptions made on future assets.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    4Reply
  • Duke Giordano
    OP
    Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    7y

    Thanks Brian, I truly appreciate your insight and your time.  It takes time to weed through the best way to formulate these foundation of 5 or so investments to start the passive RE portfolio and the make up of such. 

    To find out whether a fund invest as a middle man via another syndicator is this spelled out in the funds PPM or would I just have to ask?  Whats the best way to see this?

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    7y

    @Duke Giordano the most definitive way is to ask the fund manager if the fund’s assets will be invested in properties they will acquire and operate, or is this a joint venture fund that will co-invest with other operators. 

    You might find it in the offering documents if you look hard enough, but asking might save you that time.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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  • John Corey
    London · Member since 2019 · 722 posts · 386 votes
    7y
    Originally posted by @Duke Giordano:


    To find out whether a fund invest as a middle man via another syndicator is this spelled out in the funds PPM or would I just have to ask?  Whats the best way to see this?

    A fund is not the same as a syndication. There is a legal difference and a regulatory difference. It should be clear when you read the offer document what you are buying into. If it is not clear, move on. There will always be more options so never feel any pressure to invest before you are certain you know what you are getting. 

    Rule 1. Never lose money.

    Rule 2. Remember rule 1.

    If you are not certain, in your mind, then you are not ready.

    BTW, there will always be surprises or something you did not see coming. Like yesterday's Tour de France stage being terminated early because of a mud slide from a freak storm. That said, luck favors the bold. You need to do your homework, make a decision and then monitor how things turned out. As you repeat the process you will get better at asking questions, reviewing the published materials and conduction DD.

    You need to be able to survive the surprises so you can learn and fight (invest) another day. 

    0Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Duke Giordano

    You're asking very good questions and have certainly done your homework. I think what's important is not to dismiss one investment mechanism over the other, rather weight in both: pros and cons of each, and then evaluate each investment separately. I don't know what age category you're in, but at a certain point in life (around middle age give or take) one has to start diversifying their portfolio into investments that concentrate more on capital preservation rather than offering crazy high returns. While I'm not dismissing the fact that a combination of both is certainly ideal and is possible but given the toughened economic times we're in, I wouldn't bet on having both at the same time. So definitely speak with as many operators and fund managers as possible to find the offerings that suit your long term goals and be open to even those that are fund of funds of some sorts if that suits your timing and goals. 

    Here're a few resources to help you further:

    https://www.biggerpockets.com/member-blogs/10850/84063-private-equity-meets-stock-market

    https://www.biggerpockets.com/member-blogs/10850/84063-private-equity-meets-stock-market

    https://www.biggerpockets.com/member-blogs/10850/76728-questions-to-ask-a-syndicator







    0Reply
  • Patty C.
    Homeowner · CA · Member since 2014 · 125 posts · 33 votes
    7y

    My CFP brings in PE companies that gives us information on their business model.The ones invited in have opportunities that have been seasoned so there is a better gauge of their performance. I invested in private equity with a company that acquired, renovated, and managed student housing and assisted living facilities during the 2008 downturn with low (60%) DTI.

    This company gives the option to invest in individual properties or a collection of properties (fund). I invested in the fund. Less return, but less risk. The anticipated hold time is between 4-6 years.

    Target return on capital contribution of 7% (and currently paying 7.5%) and a 10% preferred return distribution. Got off to a shaky start and I'm glad I went through my CFP. I am only one person: He brings in many so when there is a problem, they fix it.

    The fund has been structured with pass-through depreciation and expenses. However, is that really necessary since the monthly is only a return on my capital...maybe it is banked and used to offset the distribution...a CPA question.(?)

    The company split in two and the K-1 has come after the tax deadline the past two years. 

    I'm in my third year and monthly payments have been made on time. No distribution yet. I won't know if this is a good investment until I exit the fund, get distribution from sales are made, or until the fund is sold. 1031 exchanges will be looked into at that time.

    Good luck in your pursuit.

    0Reply
  • Duke Giordano
    OP
    Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    7y

    Thanks for the info all, yes it takes time to find a good combination f investment along with a good combination of operators.  I am doing my best to do so.

    0Reply
  • Luke Miller
    Investor · Front Royal, VA · Member since 2013 · 586 posts · 418 votes
    7y

    @Duke Giordano well done doing your research. The only thing I might add is to formulate a list of questions to ask potential sponsors. If you're struggling, shoot me a message and I can send you some questions that I am regularly asked and some I encourage others to ask. 

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