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    Real estate syndication vs private equity

    • 5 min read
    • Last Modified Date: March 27, 2024
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    Both real estate syndication and private equity funds rely on real estate crowdfunding to raise money from a number of investors, making them comparable investment vehicles. However, there are a few key distinctions between private equity and real estate syndication. 

    Determining which investing approach best suits your long-term investment objectives might be aided by your understanding of these distinctions.   

    What Is Real Estate Syndication?

    A cooperation between several real estate investors and a sponsor to finance a particular development project is known as real estate syndication. On behalf of the syndication, the sponsor locates and buys the property; they frequently also oversee the investment. And because to the syndication, each investor has a portion in the property.

    Syndication and crowdfunding are similar in that they both use funds pooled from multiple investors to fund a particular deal. Although this comparison helps novice investors familiarise themselves with various investment types, syndication, and crowdfunding are not quite synonymous. 

    What Is Private Equity?

    In conventional investing, a partnership between private persons to purchase assets, holding them for a while, and then selling them is referred to as private equity. Companies, real estate projects, and infrastructures are examples of asset types. To facilitate a clearer comparison between real estate syndication and private equity, this article will concentrate on real estate projects funded by private equity.

    Because private equity funds are “private,” they are not open to the general public as per SEC regulations; to participate in this kind of fund, you usually need to have established ties with other investors and/or private equity fund managers. Because of this, high-net-worth investors often classify private equity as a strategy.   

    Similarities Between Syndication and Private Equity

    Both real estate syndication and private equity real estate investments have certain similarities and differences that you should be aware of before investing. The following are the main parallels between private equity and syndication investing.

    1. Multiple investors participate in pooling funds to finance the project(s), allowing them to access high-value deals with a lower upfront capital requirement compared to funding projects individually. However, the upfront investment needed may still be relatively high compared to other investment types.
    2. Both syndication and private equity investors benefit from passive cash flow potential as the rental income generated by the real estate assets flows through to them.
    3. Investors in both syndication and private equity have the potential to benefit from appreciation, as real estate assets naturally appreciate over time or through value-added projects, resulting in financial gains upon sale.
    4. Investing in real estate through private equity or syndication offers several tax advantages. Investors can claim depreciation deductions for the structures on their income tax returns.
    5. Both syndication and private equity options allow investors to leverage real estate professionals’ expertise, knowledge, and networks to manage their portfolios. Even without prior real estate investing experience, investors can become syndicate investors or invest in real estate funds.

    Differences Between Real Estate Syndication and Private Equity

    AspectReal Estate SyndicationPrivate Equity Real Estate
    Ownership StructureInvestors put capital directly into a property.Capital is pooled for the whole fund.
    Ownership BenefitsDirect ownership of the property, tax advantages.Investment amount shared between properties in the fund.
    Investment SelectionInvestors choose specific properties to invest in.Investors do not decide which property their funds go towards.
    TransparencyMore transparent with detailed property information.Fewer details provided for due diligence.
    Risk & DiversificationHigher risk due to the lack of automatic diversification.Less risk due to automatic diversification among fund holdings.
    Return PotentialGreater return potential due to higher risk level.Slightly lower risk level but offers favorable returns.

    Benefits of Investing in Real Estate Syndication

    Portfolio Diversification

    Real estate syndication offers the opportunity to diversify your real estate portfolio, increase liquidity, and generate regular cash flow. It is a cost-effective method of investing capital, as a large amount of capital is not required to get started. Additionally, syndication can be done with as few as two investors, and the management fees are often low or even waived.

    Tax Benefits

    Investing in real estate syndication can benefit investors seeking tax benefits in the thriving real estate market. Returns from syndication are typically quoted as an annual percentage rate. Furthermore, capital gains distributions are generally tax-free, while interest and dividend income are taxed as ordinary income. The capital gains tax rate is usually lower than the income tax rate. Typical deductions associated with real estate syndication include depreciation (accelerated), mortgage interest, property tax, and operating expenses.

    Lower Volatility Risk

    Real estate syndication poses lower volatility risks compared to private real estate funds. Syndication investments are typically long-term and can be held for extended periods, sometimes decades. This reduces the risk of losing money if real estate values decline. In contrast, investing in private real estate funds at a low price and experiencing a decrease in real estate prices can result in potential losses.

     Syndication allows investors to hold onto their investments until the market recovers, avoiding the need to sell at a loss. The structure of syndication schemes provides more predictable returns and tax advantages. Investors receive a share of the profits generated from the pooled assets’ property income, managed by an administrator who shares the returns with investors.

    Liquidity and Transparency in Securities Exchange

    Real estate syndication offers potential value appreciation in underlying properties. Investors can choose from various investment options, including actively managed portfolios of real estate assets, passively managed portfolios, exchange-traded funds (ETFs), and real estate investment trusts (REITs). This provides liquidity and transparency, allowing investors to have access to a range of investment choices in the real estate market.

    Invest in Real Estate Syndication with Assetmonk

    By engaging in real estate syndication, you have the opportunity to participate in commercial real estate investments that may have been out of reach as an individual investor. You can access such opportunities and benefit from collective investment power by pooling resources with multiple investors.

    Assetmonk is a modern real estate investment platform that focuses on offering structured high-quality deals in the real estate sector, an asset class that was traditionally only available to a select few.

     Our core principle is placing the investor’s interests first. To ensure a smooth and transparent investment experience, Assetmonk provides high-potential assets, third-party due diligence, an online tracking portal, regular updates, trustee/escrow mechanisms, tech-driven payout automation, asset management services until exit, and more. 

    Invest in real estate syndicatation with Assetmonk and experience a new way of investing in real estate.

    Bottom Line

    Real estate syndication allows individual investors to diversify their portfolios, access commercial real estate deals, and benefit from collective resources and expertise. Private equity investments, on the other hand, provide access to a wide range of assets and industries beyond real estate. 

    Ultimately, the choice between real estate syndication and private equity depends on your investment goals, risk tolerance, and desired level of involvement. It is crucial to thoroughly evaluate and understand the benefits and risks of each before deciding.

    Assetmonk is a new-age Alternative investment platform that focuses on high-potential structured quality products from Real Estate. The platform offers high-potential long-term and short-term real estate investment opportunities with a high Internal Rate of Return (IRR) and flexible liquidity options, to its value investors. 

    In addition to asset security, the company goes to great lengths to guarantee that an investor’s experience is enjoyable and rewarding. Assetmonk also promises an annual IRR of 12 to 21% on all of its assets.

    FAQs

    Q1.  Which investment strategy, real estate syndication or private equity, is better suited for passive investors?

    A. Real estate syndication is generally considered more suitable for passive investors due to its potential for consistent cash flow and the ability to rely on professional property management. Private equity investment opportunities often require a more active involvement in managing and growing businesses, making it better suited for investors seeking an active role.

    Q2. How do real estate syndication and private equity perform in terms of investment returns?

    A. Real estate syndication and private equity performance can vary based on market conditions and the specific opportunities pursued. Both investment strategies present the potential for attractive returns. Still, real estate syndication typically offers more stable cash flow through rental income, while private equity may yield larger gains but with higher volatility.

     Q3.  What are the main differences between real estate syndication and private equity investment strategies?

    A. Real estate syndication involves pooling funds from multiple investors to invest in real estate properties collectively. Private equity, on the other hand, encompasses a broader range of investments across various industries, including real estate. Real estate syndication focuses solely on real estate assets, while private equity offers diversification into non-real estate ventures.

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