Difference between Real estate crowdfunding vs Syndication?
Member since 2017 · 8 posts · 1 vote
Difference between Real estate crowdfunding vs Syndication?
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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votesOriginally posted by @Travis DeForge:
In a super simplified way I look at crowdfunding very similar to a RIET you would buy on a stock market. It is a share of ownership in a large portfolio of real estate properties, the difference is they are typically private (not sold on the stock exchange). I use Fundrise and have been very happy with it. I set my goals (appreciation/cashflow etc) and then my cash gets automatically spread out across deals that are in line with those goals. I have very little control, but it's extremely passive. I get a K1 tax form from them and file it pretty much like you would any other dividends. You can redeem your investments (shares) but it takes time, it's far less liquid than a publicly traded RIET would be.
Syndication is more like a partnership on a specific deal. You could be the managing partner and be putting the deal together or you could be more of a silent partner and just put in cash. In crowdfunding you won't be on the deed of the properties personally, where as in syndicating my understanding is that you can be. On a syndication deal you will agree to an exit strategy right from the get-go. It could be a short term investment with the intent of increasing NOI and refinancing to pay the investors back, or it could be a long term hold. It just depends on how the deal is structured.
Syndication typically has a much higher barrier for entry because of the added costs associated with setting one up. You can open a Fundrise account for $500, but It's not real common to see a syndication deal with less than a $50,000 buy in. However, If the deal is right there is a lot more upside in syndications. With more upside, comes a different degree of risk. With crowdfunding you might have $2000 spread across 40 properties in 20 different markets, if one market is doing terrible, it isn't a devastating loss. Where as if that specific market you are syndicating an apartment complex in has trouble it can be an emotional experience.
No, unfortunately a lot of this is just not accurate.
From the point of view of a passive investor in the deal: real estate crowdfunding is essentially the same thing as a syndication...except it's usually done over the Internet.
To address just a few of things being claimed:
1) REIT structure: It's incorrect that every real estate crowdfunding deal is structured as a REIT. Some are (like Fundrise and BREIT) and many aren't (which some actually prefer for certain tax benefits). And some private syndications are structured as REITs and some aren't.
2) Name on deed: this is incorrect in two ways. First, 90%+ of syndications don't have investor names on the deed. Second, it's there are real estate crowdfunding deals that have investor names on the deed, too (and the percentages about the same).
3) Exit strategy: It's incorrect to say that syndications in real estate crowdfunding differ this way. There are some real estate crowdfunding deals that specify the exit strategy in advance and others that don't. The same with syndications.
4) Barriers of entry: again incorrect that syndications are more expensive for the sponsor to set up than real estate crowdfunding and thus have higher minimums. In actuality, Fundrise (which was used as an example) uses regulation A+ which is one of the most expensive ways to raise money. And they pass this expense onto the investor too. There are many other deals (both syndication and real estate crowdfunding) that don't use regulation A+, and thus are much cheaper, and don't pass this expense onto the investor.
5) Minimums: again incorrect that real estate crowdfunding rooms are lower than syndications. For example, Carlton Crowdfunding has minimums over $1 million. The minimums actually vary widely in both categories. The lowest minimums do tend to be the regulation A+ offerings (although as mentioned above, investors usually end up paying for it with increased fees being passed on to them).
5) Different risk: again incorrect. Whatever type of risk you are looking to take, you can probably find it in one of the other.
--------------------------------
In my opinion, the biggest differentiation between old-school syndications and real estate crowdfunding is that many of the most experienced sponsors (with full real estate cycle experience or more) and most successful (never losing investor money or losing very little) cannot be found in real estate crowdfunding. This is because they already have built up such a reliable base of investors that they don't need to pay a third-party company to raise money for them. There are a few that will be found in the platforms, but typically you have to find them by networking through an investor club or through personal contacts.
The Real Estate Crowdfunding Review
13 Replies
- Rental Property Investor · Wiesbaden, Germany · Member since 2019 · 49 posts · 50 votes7y
In a super simplified way I look at crowdfunding very similar to a RIET you would buy on a stock market. It is a share of ownership in a large portfolio of real estate properties, the difference is they are typically private (not sold on the stock exchange). I use Fundrise and have been very happy with it. I set my goals (appreciation/cashflow etc) and then my cash gets automatically spread out across deals that are in line with those goals. I have very little control, but it's extremely passive. I get a K1 tax form from them and file it pretty much like you would any other dividends. You can redeem your investments (shares) but it takes time, it's far less liquid than a publicly traded RIET would be.
Syndication is more like a partnership on a specific deal. You could be the managing partner and be putting the deal together or you could be more of a silent partner and just put in cash. In crowdfunding you won't be on the deed of the properties personally, where as in syndicating my understanding is that you can be. On a syndication deal you will agree to an exit strategy right from the get-go. It could be a short term investment with the intent of increasing NOI and refinancing to pay the investors back, or it could be a long term hold. It just depends on how the deal is structured.Syndication typically has a much higher barrier for entry because of the added costs associated with setting one up. You can open a Fundrise account for $500, but It's not real common to see a syndication deal with less than a $50,000 buy in. However, If the deal is right there is a lot more upside in syndications. With more upside, comes a different degree of risk. With crowdfunding you might have $2000 spread across 40 properties in 20 different markets, if one market is doing terrible, it isn't a devastating loss. Where as if that specific market you are syndicating an apartment complex in has trouble it can be an emotional experience.
- London · Member since 2019 · 722 posts · 386 votes7y
Nice reply Travis. You covered a lot of ground.
Do you know of any USA crowdfunding sites where individual investors get to pick specific investments? Single property deals so not a portfolio.
My experience has been with some UK real estate crowdfunding sites. Each raise is for a specific property and it might be for a specific phase (planning, construction, rental) rather than the full life of the ownership for the property. The minimum investment is £100 for most sites with some going as low as £1.00. The UK regulator is the FCA (Financial Conduct Authority; the UK's version of the SEC). In the UK retail investors can invest in any offer on an authorized crowdfunding site. The UK does not call it crowdfunding if you need to be the equivalent of accredited.
I am interested in doing more with the USA given I will be spending more time in the USA rolling forward.
- 7yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Originally posted by @Travis DeForge:
In a super simplified way I look at crowdfunding very similar to a RIET you would buy on a stock market. It is a share of ownership in a large portfolio of real estate properties, the difference is they are typically private (not sold on the stock exchange). I use Fundrise and have been very happy with it. I set my goals (appreciation/cashflow etc) and then my cash gets automatically spread out across deals that are in line with those goals. I have very little control, but it's extremely passive. I get a K1 tax form from them and file it pretty much like you would any other dividends. You can redeem your investments (shares) but it takes time, it's far less liquid than a publicly traded RIET would be.
Syndication is more like a partnership on a specific deal. You could be the managing partner and be putting the deal together or you could be more of a silent partner and just put in cash. In crowdfunding you won't be on the deed of the properties personally, where as in syndicating my understanding is that you can be. On a syndication deal you will agree to an exit strategy right from the get-go. It could be a short term investment with the intent of increasing NOI and refinancing to pay the investors back, or it could be a long term hold. It just depends on how the deal is structured.Syndication typically has a much higher barrier for entry because of the added costs associated with setting one up. You can open a Fundrise account for $500, but It's not real common to see a syndication deal with less than a $50,000 buy in. However, If the deal is right there is a lot more upside in syndications. With more upside, comes a different degree of risk. With crowdfunding you might have $2000 spread across 40 properties in 20 different markets, if one market is doing terrible, it isn't a devastating loss. Where as if that specific market you are syndicating an apartment complex in has trouble it can be an emotional experience.
No, unfortunately a lot of this is just not accurate.
From the point of view of a passive investor in the deal: real estate crowdfunding is essentially the same thing as a syndication...except it's usually done over the Internet.
To address just a few of things being claimed:
1) REIT structure: It's incorrect that every real estate crowdfunding deal is structured as a REIT. Some are (like Fundrise and BREIT) and many aren't (which some actually prefer for certain tax benefits). And some private syndications are structured as REITs and some aren't.
2) Name on deed: this is incorrect in two ways. First, 90%+ of syndications don't have investor names on the deed. Second, it's there are real estate crowdfunding deals that have investor names on the deed, too (and the percentages about the same).
3) Exit strategy: It's incorrect to say that syndications in real estate crowdfunding differ this way. There are some real estate crowdfunding deals that specify the exit strategy in advance and others that don't. The same with syndications.
4) Barriers of entry: again incorrect that syndications are more expensive for the sponsor to set up than real estate crowdfunding and thus have higher minimums. In actuality, Fundrise (which was used as an example) uses regulation A+ which is one of the most expensive ways to raise money. And they pass this expense onto the investor too. There are many other deals (both syndication and real estate crowdfunding) that don't use regulation A+, and thus are much cheaper, and don't pass this expense onto the investor.
5) Minimums: again incorrect that real estate crowdfunding rooms are lower than syndications. For example, Carlton Crowdfunding has minimums over $1 million. The minimums actually vary widely in both categories. The lowest minimums do tend to be the regulation A+ offerings (although as mentioned above, investors usually end up paying for it with increased fees being passed on to them).
5) Different risk: again incorrect. Whatever type of risk you are looking to take, you can probably find it in one of the other.
--------------------------------
In my opinion, the biggest differentiation between old-school syndications and real estate crowdfunding is that many of the most experienced sponsors (with full real estate cycle experience or more) and most successful (never losing investor money or losing very little) cannot be found in real estate crowdfunding. This is because they already have built up such a reliable base of investors that they don't need to pay a third-party company to raise money for them. There are a few that will be found in the platforms, but typically you have to find them by networking through an investor club or through personal contacts.
The Real Estate Crowdfunding Review - Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
I like how @Travis DeForge has broken it down for you. I tend to agree that crowdfunding platforms in a lot of cases have much lower barriers to entry (in other words minimums), however I cannot comment on the quality of their investments. Also from my limited trial of some of the crowdfunding sites, I believe you're disconnected from the deal sponsors and don't have directed access to them.
The syndication outside of such crowdfunding platforms allows such connection. You're speaking directly with the deal sponsor(s) and getting the responses directly from them. And hence allow yourself to determine whether there is an alignment not only in terms of the investment but also in terms of the personal connection. In other words, does a deal sponsor sound like someone you'd want to invest with as a person. You still have to verify their credibility but speaking with a person and potentially meeting face to face helps a lot as well.
I will also let @Ian Ippolito - the crowdfunding expert to give you additional guidance.
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
John Corey
If you want to invest in US (crowdfunding or not), you need to find out what US requirements are for foreign nationals. I'm only assuming that since you mentioned you'll be spending time in US. If you have however a US citizen then it's another story.
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Ian Ippolito:
Ian,
Are you describing a legacy issue? That the established players have the old way and it works well for them given they have already built a network of investors.
That new operators, who used to have to use the 'old way', will migrate to the crowdfunding model (SEC definition)?
Second question. I expect a correctly set up crowdfunding platform will have a fee. You can not operate per the SEC regulations without some costs. Are you saying that I, if I had a project that the platform was happy with, should assume that I can let the platform do the fundraising?
In a different market, the platforms handle the process while the party with the project brings their network to the site. The site is providing the air cover for a collective investment scheme EU wide and the associated details related to the financial promotion. While in the USA it looks like you need to register with the SEC, in the UK, you just use a crowdfunding platform. No FCA registration required. - London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Alina Trigub:
John Corey
If you want to invest in US (crowdfunding or not), you need to find out what US requirements are for foreign nationals. I'm only assuming that since you mentioned you'll be spending time in US. If you have however a US citizen then it's another story.
I am interested in knowing the foreign national regulations. That said, I am a USA citizen. I am more interested because of the network of investors I work with who are not USA citizens. That is a bit of a tangent though as I can solve the 'issue' if needed. Not really where I was heading yet still interested.
More interesting to me is your (limited) experience with crowdfunding vs syndication. Direct access to deal sponsor(s) caught my attention. I am used to UK crowdfunding where you definitely have direct access to the whole team at the deal sponsor. I am not used to crowdfunding where there is a layer of indirection.
- Rental Property Investor · Wiesbaden, Germany · Member since 2019 · 49 posts · 50 votes7y
@Ian Ippolito, thank you so much for correcting me on this. I definitely had some misconceptions and misunderstandings. I appreciate it!
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes7y
John,
I joined a few crowdfunding sites to get a feel for their deals. After finding a few deals that make sense to me, I've asked to speak with the sponsors and was asked to provide the questions instead. They'd follow up with responses, which I much rather preferred to have a conversation around.
As for the foreign nationals in a syndication, it is my understanding they'd need to have US-based tax ID (either SSN or EIN) and US based bank account. You should still double-check this with an attorney that works with foreign nationals.
Originally posted by @John Corey:
Originally posted by @Alina Trigub:
John Corey
If you want to invest in US (crowdfunding or not), you need to find out what US requirements are for foreign nationals. I'm only assuming that since you mentioned you'll be spending time in US. If you have however a US citizen then it's another story.
I am interested in knowing the foreign national regulations. That said, I am a USA citizen. I am more interested because of the network of investors I work with who are not USA citizens. That is a bit of a tangent though as I can solve the 'issue' if needed. Not really where I was heading yet still interested.
More interesting to me is your (limited) experience with crowdfunding vs syndication. Direct access to deal sponsor(s) caught my attention. I am used to UK crowdfunding where you definitely have direct access to the whole team at the deal sponsor. I am not used to crowdfunding where there is a layer of indirection.
- Member since 2017 · 8 posts · 1 vote7y
Thank you for explanations - v helpful.
If you've $100K and say 10 years (you wouldn't need that money) - where would you invest ?
In a CrowdFunding or in Syndication deal?
After 10 years - would I still get my money back- with appreciation or the same amount?
- 7yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Yes, it is generally the newer operators who need crowdfunding platforms to find investors. Arguably when they become experienced, full-cycle sponsors with large investor bases, they won't anymore.
If you are a sponsor, yes there will be costs to you listing your deal on crowdfunding platform. It's not just the regulations, but they also have to make a profit to stay in existence and provide the service.
There is no model for how all the platforms work. Some of them sell sponsors access to their investors. So yes, for the platform do the fundraising. If you're trying to raise $100m, you're unlikely to raise it on a platform and need to have other channels. On the other hand differ trying to raise $2 million, and you have a good offering you my pupil to raise it all.
On the other hand there are some platforms who do not offer you any investors at all and are simply white label. What this means is that they give you all the software to make everything work, but you bring your own investors. This can be cheaper if you are an established operator.
Also, a sponsor does not necessarily have to register with the SEC to list in a platform. Most of the accredited offerings operate under exemptions to SEC registration for example.
The Real Estate Crowdfunding Review - London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Rocky Rock:
Thank you for explanations - v helpful.
If you've $100K and say 10 years (you wouldn't need that money) - where would you invest ?
In a CrowdFunding or in Syndication deal?
After 10 years - would I still get my money back- with appreciation or the same amount?
I am unable to give financial advice. More so when I do not know your circumstances. Here are some questions to ponder with comments.
1. If you have $100K, would it be better to put it all into 1 deal or into 10 deals (10% of $100K in each)? If you put it into 1 and that deal does well, great. If that one blows up, what then?
If you put it into 10 deals and 5 do well, 3 have some issues and 2 are a mess, what then?
2. Do you have the skills to pick? If you are the passive investor, you want to pick the management or the operator well enough so you feel your funds are safe. While there is never a guarantee (run if someone offers a guarantee), you want to tilt the odds in your favor with savvy choices.
If you lack the knowledge and skills, start slow. Assume you have time to learn and you should put small amounts in while you are testing your due diligence skills.
3. Putting your funds in for 10 years can be a smart move if you really do not need the funds and the investments chosen are good ones. Time heals a lot of sins.
That said, life has a way of changing our priorities. If you really did need some or all of the money back, is there any way you could liquidate your position(s)? Even if you had to take a haircut (receive less than full face value), could you get out?
When an investment is illiquid (no real way to exit), you need a higher rate of return to compensate for the funds being locked up.
4. Remember, everything on the way in is just a projection. There are no guarantees. Even past track records are not a guarantee.
When two people walk down the aisle, they think they are getting married until they die. 50% of the marriages end in divorce. None of the people getting married think they are part the 50% who will be divorced. Clearly, what we want to believe and what statistics tell us can vary a lot.
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