Privet Equity Investments

[Moris Reyes]

Would you put your money in Syndicate or Fund? And why?

[Chris Seveney]

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

Quote from @Moris Reyes:

Would you put your money in Syndicate or Fund? And why?

 We just completed an article on this. My preference is a fund, but there is no right or wrong answer:

What is the Difference Between a Real Estate Fund and a Syndication?

Over the past decade, the number of investment options has significantly evolved due to the JOBS act of 2012. The JOBS act allowed sponsors to raise funds from accredited and non-accredited investors through an SEC exemption called Regulation D and through SEC qualified opportunities such as Regulation A+ and CF.

If you are a passive investor, understanding the differences between a Fund and a Syndication are important as each poses varying levels of risk that should be understood as part of the investment process.

This article will highlight some of the significant differences between the two. Just remember, each has its pros and cons and as a passive investor you should always invest in the opportunity that meets your investment strategy after thoroughly vetting the sponsor.

What Is a Syndication?

A Syndication is an investment vehicle where multiple investors’ money is pooled together to invest in a single real estate opportunity. When you hear a General Partner (also known as a Sponsor) mention they acquired a $20M multi-family property. The majority of these were done through syndication. The General Partner will raise the funds from investors who are known as limited partners.

What Is a Real Estate Fund?

A Real estate fund is an entity formed to pool investor money but instead of acquiring a single asset, the capital raised from investors is invested in multiple assets. For example, our company CWS Investments Inc. is a qualified regulation A+ offering which is a real estate fund as we currently have over 100 assets in the fund as of this writing in December 2022.

Comparing Real Estate Syndications and Funds

When it comes to the question of whether to choose either syndication or a fund, there are some considerations to keep in mind.

Length of Investment

Syndications terms will be stated but can vary significantly and are not as finite. The end date is typically when the asset is sold, so the sponsor may give a target range (5-7 years is quite common). However, the exact end date is ultimately up to the discretion of the sponsor. I’ve seen syndications that end in 2-3 years because it was a great opportunity to sell, but I’ve seen ones go 9-10 years due to inability to liquidate.

Real estate funds can be classified as open or closed. A closed fund, like a syndication, will have an end date that is a range and the close of the fund depends on when the last property in the fund is sold.

In an open fund, like our Regulation A+ offering, an investor can join, receive returns, and withdraw from the fund according to their terms of the offering (for example in our fund investors can liquidate after four years).

In a fund and syndication, the terms may allow for money to be withdrawn early, but if allowed, there typically are penalties.

It is important to understand the terms of the investment and consider if it is aligned with your timing. This is important as in a syndication or fund, your investment is illiquid unless the company is publicly listed.

Due Diligence

In both offerings, the investor must do a thorough review of the Sponsor. In our prior blog post we wrote on Bigger Pockets "How to vet your sponsor and questions to ask your sponsor" which provides additional information on due diligence. Once you are comfortable with the experience of the sponsor, then you would dig deeper into the offering. For a syndication, the investor should review the specific deal. You will want to review the current operations of the property and the future assumptions after acquiring the asset. Does the offering make sense and is it reasonable given the current state of the market and the sponsors prior history?

For a fund, you will want to first focus on the sponsor. After doing a thorough analysis on the sponsor, review the business plan. In many fund opportunities, they will be a “blind pool.” Blind pool means all of the assets have not been selected and the fund will be buying and selling assets throughout the life of the fund. This is different from a syndication where the asset is typically already picked out. Therefore, it is important to understand the business plan and have trust in the sponsor.

Diversification

As mentioned, a syndication is an investment in a single asset. Thus, there is no diversification – all your eggs are in that one basket. You would need to invest in multiple syndications to achieve true diversification.

Funds invest in multiple assets. For example, not only is our fund invested in over 100 assets, but these assets are in over 30 states and are a makeup of performing loans, non-performing loans and several rental properties. Funds are more diversified because of this.

Some may compare investing in a Fund vs Syndication like investing in an individual stock versus mutual fund or ETF since the latter are not singular. Typically, when an investment vehicle is more diversified, it will carry less risk which we believe a fund does.

Investment Minimums

The minimum investment amount will vary depending on the offering, but a fund typically has a significantly lower barrier of entry than a syndication.

For most syndications, the minimum will start at $25,000 and go up from there. For funds, even though they are larger in size compared to a syndication because they have multiple investments, they have more staff and can take on lower investment amounts. For example, within our fund the minimum investment amount is only $500.

Investor Returns

In both syndications and funds, returns are typically offered in the same manner called a “preferred return.”

For example, the Sponsor might advertise an 8% preferred return. This means the first 8% of profits after expenses are distributed to the investor*. Please note this preferred return is not guaranteed. It stipulates the first 8% goes to investors, but if profits are only 4%, the investor would receive 4%.

In some instances, the sponsor may share in the profits above the preferred return. This is called a “waterfall”. This is more common in a syndication because of the risk and less frequent in an open-ended fund.

The most common question investors ask is, do syndications or funds offer the potential for higher returns? It is more common to see a syndication offer a higher return to go along with the greater risk factor involved in a syndication, but not all syndications offer additional upside.

*When reviewing the documents from the Sponsor, make sure to understand their fee structure. Some funds are frontloaded with fees; thus the returns are not a true preferred return.

Risk

Within any investment there is going to be risk. If you are ever promised “guaranteed” returns, walk away from that deal immediately. Two of the biggest risk factors are diversification and due diligence on the sponsor, which we touched upon earlier in the article.

When it comes to risk management, never feel like you have asked too many questions. Knowledge is power and as a sponsor, we prefer to have our investors knowing not only who they are investing in, but also what they are investing in. Education and knowledge are key to being comfortable investing in a syndication or fund.

Summary

Whether you should invest in a syndication, or a fund is a matter of preference. Both options can be used to generate passive income. However, there are significant differences that should be considered. As an investor you should weigh the pros and cons of each investment type.

Personally, we prefer to invest in open funds. We chose open funds because of the diversification of the fund and the ability to know when our exit will occur. In writing this article in December 2022, we are at a time of some instability in the markets due to inflation and high interest rates. Due to this, real estate transactions for multi-family properties have come to a screeching halt. If we were invested in a multi-family syndication, we would not be able to exit the fund. In some instances where properties were also financed, not only are investors not able to exit, but they are receiving capital calls to invest more money due to the loan maturing and the condition to refinance at a higher rate. While a syndicator may provide slightly higher upside, we prefer flexibility and diversity.

Whichever investment vehicle you choose, we cannot stress enough to do your due diligence on the fund and the sponsor (attach link again). Even if you are leaning towards not investing in deal, we recommend going through the process to gain valuable experience in the process.

We hope you found this informative and we wish you the best of luck in your investment journeys.

Chris,  when you say assets your not describing 100 apartments complex's your fund buys Notes right ?? and so you have 100 separate notes in your fund with new ones added some paying off ( hopefully ) and some going through foreclosure and ultimate resale of the assets.. I think its an important distinction to make when describing the differences between your fund and a fund or a stand alone syndication.. and I realize BP rules are such you have to be cautious on your posts.. So if I am wrong on this please correct me but I think the readers probably want to know your talking 100 debt instruments not 100 apartment complexes so apples and oranges.. I find in my experience of working with investors the last 4 decades most all understand rentals and MF but most do not understand being the bank and its a little bigger education process.

Correct - if this is considered self promote BP can remove, I try and avoid it. We have different asset classes in our fund and I agree 100% people tend not to understand the note side of a fund. What I was trying to use as an example is a fund is a group of assets vs.a syndication is a specific asset.