Real estate syndications VS real estate crowdfunding sites

4 Replies

Maybe one of your friends claims they invested in a syndication deal for just a few thousand bucks. This is because recently, real estate crowdfunding sites like RealtyMogul, RealtyShares, and Fundrise have helped make it possible for millions of people to invest passively in real estate.

Real estate crowdfunding sites can be a good place to find real estate syndication offerings. However, there are a few things you should keep in mind.

First, most of these platforms require that you be an accredited investor in order to invest in their real estate syndication offerings.

Some of these platforms do offer REITs (real estate investment trusts) as an alternative for non-accredited investors. Typically, you can invest in these REITs with a low minimum investment (you can invest in Fundrise’s eREIT for just $500).

Just be aware that REITS are not real estate syndications. Rather, it’s a fund, which is likely what your friend actually invested in.

When you invest in a REIT, you're investing in a company that buys real estate; you don't have direct ownership of the underlying asset yourself, like in a real estate syndication. You would likely still get good returns, you would be investing in a bunch of assets rather than a single one, and you wouldn't get the same tax benefits as with a real estate syndication.

Agreed! One of the biggest differences between a REIT and syndication is the tax benefits the investor receives.

With a REIT, you receive dividends which are taxable unless you have losses you can apply. You'd have to take the step to sell off investment losses then claim them on your tax returns.

With a syndication, you also have taxable passive income, but if the operator is doing things right, you will receive depreciation benefits which can offset most if not all of your distributed cash flow. If the operator does a cost segregation and takes the bonus depreciation, then you should see even more upfront depreciation. As a passive investor, you will have to do little to no work to claim this benefit. Just ensure the sponsor/GP/operator you are working with has this built into their plan.

Originally posted by @AJ H. :

Agreed! One of the biggest differences between a REIT and syndication is the tax benefits the investor receives.

With a REIT, you receive dividends which are taxable unless you have losses you can apply. You'd have to take the step to sell off investment losses then claim them on your tax returns.

With a syndication, you also have taxable passive income, but if the operator is doing things right, you will receive depreciation benefits which can offset most if not all of your distributed cash flow. If the operator does a cost segregation and takes the bonus depreciation, then you should see even more upfront depreciation. As a passive investor, you will have to do little to no work to claim this benefit. Just ensure the sponsor/GP/operator you are working with has this built into their plan.

 Great points! Thanks for adding this. 

@Justin G. there seems to be some misconceptions about what a syndication really is. While the common understanding is single deal with passive investors is a syndication, a Fund is a syndication, as is a REIT. By definition a real estate syndication is anytime a group of people are brought together to take control of real estate.

That being said, you bring up some good points about the SEC rules on marketing of offerings.  As well as being a publicly registered company versus private company versus publicly traded.  

The crowdfunded REITs I have seen would qualify as non-traded REITs.  You cannot go to NASDAQ or NYSE and buy and sell shares (hence non-traded), but they are registered and report financials to the SEC, as other publicly traded companies do.  Because of the reporting, they can accept unlimited non-accredited investors.  506(b) private offerings don't need to report any financials. publicly, and can accept 35 non-accredited investors.  And then you have 506(c) offerings that can publicly market (hence all crowdfunding options) and can only accept accredited investors.  And each has their own trade offs.

There is another, and likely less common structure, the public partnership.  Reporting is still required similar to all public companies, but the investors are still in a partnership and therefore receive a K-1.

In general there’s no major difference between an old-fashioned syndication and a deal that’s done on the Internet through crowdfunding.

The biggest difference is that there are newer laws which allow marketing to a larger audience (where before it could only be offered to people that the sponsor already knew through word of mouth). So the sponsor has to jump through extra regulatory hoops to take advantage

The other things you’re mentioning are not really differences. For example you can find REITs in both non-crowdfunded and crowdfunded offerings.

Also usually both are passive investments (meaning that the investor does not have direct control). The exception is if it’s a joint venture, but that usually requires bringing a significant amount of money (often a majority) and is something many investors would rather not do.