Opinions on crowdfunded REIT's vs. syndication deals?

16 Replies

I have been looking at some of these offerings from Fundrise and Realty Mogul such as Mogule Reit II and they look quite good.

If my goal is to be a passive investor, why wouldn't I buy a REIT vs. invest in syndication deals? The syndications have much higher minimums and are inherently concentrated / undiversified, whereas the REIT's are diversified geographically and have low minimums, so I can diversify across different funds, real estate sectors, etc.

I have invested in two syndication deals in the past, one of them was a home run, the other has been disappointing. At least with the REIT's, the manager has the ability to go where the best deals are, whereas with syndications I am limited to my network and deal sponsors who will take me in their deals. I am not yet accredited.

The only good reasons I can think of are:

1) If I can find a deal that is better than the market average. The odds are stacked against me here since I can't get into most deals.

2) Tax treatment. REIT's get no depreciation. Although, syndications rarely do 1031 exchanges so all those deferred taxes will come due when they get sold.

3) To get investing credibility with lenders and brokers, since I can say I was a partner in a MF deal, in case I want to purchase a MF property as an IRO in the future.

4) To develop contacts with sponsors and investors who might be able to help me in the future, by being advisors or key principals.

@Nate Reed I have a strong suspicion that some of the preferences towards syndications is emotional. You could buy a publicly traded REIT tomorrow but it doesn’t as cool, sexy, exclusive as a syndication. And you get to “prove” how smart, savvy, etc. you are by cherry picking your particular deal and/or sponsor. Now I’ll be the first to say that (like individual stock picking) you can get a higher return.

That said, if you know a trust a sponsor/lead and they’ve done well you at least know whom you’re trusting your decisions to. You can probably even speak to that person. You go into a giant fund, a publicly traded REIT, etc. and that goes away.

Originally posted by @Andrew Johnson :

Nate Reed I have a strong suspicion that some of the preferences towards syndications is emotional. You could buy a publicly traded REIT tomorrow but it doesn’t as cool, sexy, exclusive as a syndication. And you get to “prove” how smart, savvy, etc. you are by cherry picking your particular deal and/or sponsor. Now I’ll be the first to say that (like individual stock picking) you can get a higher return.

Wow, interesting insight. It's ego! That makes sense.

Yes, you can get a higher return, but you could also do worse than average, and unless you are very wealthy you can't invest in a large enough number of deals for the law of large numbers to work.

Originally posted by @Andrew Johnson :

That said, if you know a trust a sponsor/lead and they’ve done well you at least know whom you’re trusting your decisions to. You can probably even speak to that person. You go into a giant fund, a publicly traded REIT, etc. and that goes away.

I've found people's motivations change over time. As they get bigger, they're less interested in making great investments and more interested in earning fees.

Also, minority shareholders in a syndication don't have much influence anyways.

@Nate Reed Who knows, I’m not a syndication guy. I’d never want to turn over control, have someone else decide it was time to sell, have someone else decide how much or little preventative maintenance to do, etc. And I really want the tax benefits. Couple those together and I might be the worse guy to answer :)

But I did invest in publicly traded REITs in the past. You can buy them on Fidelity (or any other platform) for a few bucks a trade, get my money back, and they are soooooo diversified that single issues in the portfolio wouldn’t even hit a bottom line.

However, I never got to say “I’m a 5% owner of a strip mall in Nashville” or anything similar. I didn’t get to comb through hundreds of offerings and cherry pick the “best” (quotes intentional) deal. If you’re on BiggerPockets I’d imagine you think you’re smarter than the average bear when it comes to doing a deal or choosing a deal. If not, you’re hear to learn that skill. Frankly, you just don’t get that satisfaction out of choosing a fund where you’re a .00000003% owner 🤷🏻‍♂️

I understand. My desire to be a solo RE investor has waned as I've learned that it's actually a lot of work and I don't really have the time to do it right due to my job. Despite the disadvantages that you point out, syndications fit my current situation.

Those unlisted REIT's I mentioned are smaller than publicly traded REIT's. They are bought and sold at asset value minus fees, unlike public REIT's which can trade at premium and fluctuate between discount and premium due to trading on the stock exchanges. Unlisted REIT's are relatively illiquid.

They execute very specific strategies unlike the large institutional REIT's that trade publicly. For example, Mogul REIT II does deals that look very similar to the value-add syndications I am interested in. Most of the deals are in TX and they are targeting 5-6% COC, 14-16% IRR. They only have 4 properties in the portfolio currently.

I think it depends largely on the deal/Sponsor:

1. What type of relationship do you have with the Sponsor? Who from the GP brought you in to the deal? Do you have easy access to information or to ask questions? This isn't the case with a REIT.

2. In what market is the deal (or does the Sponsor operate) in? As @Andrew Johnson said, with the right deal and team, you absolutely can earn higher returns.

3. How conservative is the Sponsor in their underwriting? Downside protection is huge and commercial MF has, historically, at least survived big market downturns. Very conservative Sponsors can even provide a small return.

Also, you may know this already, but limited partners have limited influence (voting right) for a good reason - liability. The second they start having voting rights, they'll likely be liable beyond their initial investment in the event of a lawsuit or some similar event. Thought that was important to mention as mitigating downside risk is a big stress point for most (if not all) Sponsors.

All that being said, I personally think both can be good investments. Really just depends on the individual investor - which fits best in to their investment portfolio, how risk averse are they, how much money are they looking to deploy at the moment, etc.

If you're like @Andrew Johnson and like to be in control of your real estate investments, syndication is 100%.. nay, 110%.. not for you. Unless you're on the GP side.. then maybe.

Well, yeah... I was comparing two relatively passive options. Best analogy is stock-picking vs. fund investing (thanks Andrew). Don't know why I didn't think of that before.

@Nate Reed the funny thing is either way you are investing in the same thing.  Do you think that the REIT is buying property?  Nope, they are investing it in syndicated deals, either as an investor or as the only investor.

So by investing directly in syndications you're cutting out the middleman (and the added layer of fees).  But by investing in the REIT you get to spread your risk amongst a smorgasbord of assets.  That's probably a good thing, because the restrictions in the REIT constrain them to investing in deals that are likely less than the best.

Originally posted by @Brian Burke :

@Nate Reed the funny thing is either way you are investing in the same thing.  Do you think that the REIT is buying property?  Nope, they are investing it in syndicated deals, either as an investor or as the only investor.

So by investing directly in syndications you're cutting out the middleman (and the added layer of fees).  But by investing in the REIT you get to spread your risk amongst a smorgasbord of assets.  That's probably a good thing, because the restrictions in the REIT constrain them to investing in deals that are likely less than the best.

As I understand it, the REIT is the sole buyer of the assets, using debt financing and equity from investors. They pay asset managers 2%, similar to a deal sponsor. I don't see anything about an equity split but I assume that's part of the compensation. They also charge a 3% disposition fee - similar to many deals I have seen. I assume they hire a property management company that is part of the above-the-line operating expenses, same as in syndication deals.

Define "best". They probably have strict underwriting standards. Are they missing the best deals or deals that might be deemed too risky (deep value and repositioning plays, for example)? I'm guessing the latter. 

Really, the fees look quite reasonable by comparison. I would imagine with all the layers separating me from my money it is far from optimal, but if i was only trying to optimize my expenses then I would just buy RE outright. I need the buying power of a group to get exposure.

I haven't seen any deep value / complete repositioning plays recently. I heard someone (I believe it was Gene Trowbridge) say on a podcast the other day, those deals that take a year or more to establish and get cash flow, they don't exist anymore at this point in the market cycle.

Ok, I will stop trying to rationalize my thinking. I probably will take a little bit of $ and put it into a couple of these REIT's just to see how they work.

Will stay plugged in with syndications, too, because I like to read the PPM's and practice my underwriting skills.

If you are coming out of real estate - do a 1031 exchange - buy investments that qualify in the exchange.  There are similar options to what you mentioned that you CAN 1031 into. Keep looking.  Your 1031 Exchange Accommodator can give you some suggestions.  REITs and other real estate options that do NOT work for a 1031 are good for funds that come from something else that you want to put in real estate. But you can also use those funds to buy ... real estate .. then 1031 out of it when it appreciates.  The 1031 is a very effective tool for real estate investors.  When it's not being used, the question should be asked why not.  

@Nate Reed I think you have received outstanding feedback from @Andrew Johnson , @Michael Bishop , & @Brian Burke  already. What I want to add is:

1) when evaluating returns, try to quantify the tax benefits of MFH syndications as a part of the returns! you're saving on taxes through the power of depreciation! Granted it gets recaptured during the asset disposition, but it is only at the end of the process after holding the asset for X many years and ripping the tax benefits of it!

2) quantify the removal of middleman as @Brian Burke mentioned. Add it back to your MFH syndication return.

3) compare the overall terms (not just the COC and IRR). Are you comfortable with the length of the holding period in syndications versus REITs?

It all comes down to, what makes the most sense at a specific point in time and whether you're diversified enough at this point. When reviewing the overall portfolio don't forget to account for your 401K and IRA plans if you have any. Determine whether you're fully diversified or some of the IRA money could use diversification into real estate or other asset types. And potentially consider SDIRA.

If I can be of service further, feel free to PM me directly.

Best!

@Nate Reed ,  I invest in both private REITs and syndications.  What you’re asking is a very complicated question, because it depends a lot on your situation. 

 Those nonaccredited REITs mentioned have some significant limitations versus other options.  First, they tend to have very high fees, promotes, etc. compared to syndications and accredited investor REITs.  Profits are never guaranteed, but the fees usually are, so this can be very important. 

Also, many sponsors do not have experience through the entire real estate cycle,  which to me is a huge thing since we are so late in the current cycle. If you choose a syndication or accredited investor REIT properly, you won’t have this problem. 

They also mostly have minuscule skin in the game, meaning they have no financial incentive to manage your money conservatively.  A well chosen syndication or accredited investor REIT, shouldn’t have that problem. 

 The advantages you mentioned, like diversification are legitimate. However these are also things that you can find in some syndications  and accredited investor REITs as well. 

In my opinion, the main advantage of those nonaccredited REITs is that they have a very low minimum.  You can get in as low as $500, versus an average of $50k-$150k for other options. 

 For someone without a lot of money to invest, they might make sense.  On the other hand, some people with more to invest, may prefer other options.  

This is an interesting discussion. Set aside public REITs, they fluctuate like the stock market and you have little control.  Apart from directly owned rentals, I invest in two types of passive private placements. One type is project based syndication such as investing in a particular apartment complex or flip or similar. All the money is attached to the single project. The other kinds are funds (or REITs if you like) that could be hard money funds, or  tax lien funds etc. 

I find that the funds have the advantage of more liquidity (i.e you can pull your money out but not overnight like a public REIT) but the syndications you are in for the project duration. 

The funds provide decent consistent returns (10-12%) with compounding possible.

The syndications target higher IRR (15-20%) but you give up liquidity and take on a bit more risk.

I think there is place for both in a portfolio.

I should mention I am accredited so have more options than the OP

Target IRR on Realty Mogul Reit II is 14-16% and 5-6% COC (passive investor distributions), net of fees. The fees are similar to those of syndications I have seen recently (management fee, disposition fee).

I believe the underwriting standards are solid based on what I read in the prospectus.

Liquidity is slightly better. You can get your money out in stages and in year 3 can fully redeem your shares IIRC.

I am not saying I will go this route in the future, but it's something I've entertained.

I've seen a few solid, value-add syndication deals in my market recently. They're always oversubscribed and there's an internal tension between wanting to commit enough capital to get into the deal and wanting to invest in more opportunities and not be over-exposed to one deal / one sponsor / one city. 

This crowdfunding movement is really amazing and promises to make the commercial RE market more efficient. I'm thinking you will see more and more niche funds available to both unaccredited and accredited investors, and eventually the minimums on the syndication deals will be lower. Fees for all offerings should go down over time.

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