I was a tech employee for many years and my main interest in getting into real estate was to discover the types of real estate investments that would generate income for tech employees. Many tech employees don’t have income generating assets in their portfolio.
In digging into the real estate market and looking at various real estate assets, I naturally came across popular real estate crowdfunding platforms and real estate syndications. I quickly learned that commercial real estate investments were one of the best ways to generate steady passive income in a tax efficient manner. The problem with commercial real estate is that it is typically out of reach of the individual investor.
The real estate crowdfunding space seemed to offer a solution to this. I started digging into these crowdfunding platforms to learn how they worked. Wealthward Capital ultimately decided to offer a real estate syndicate solution instead to our real estate investors because we believe this investment vehicle reduces risks and provides a better return for high-earning tech employees who are also accredited investors.
But the research I conducted into real estate crowdfunding platforms and real estate syndicates might be useful for people looking for information on the topic. So I put together this article so people know what real estate crowdfunding refers to and how it relates to the real estate space.
What is Real Estate Syndication?
Real estate syndication is when multiple investors — whether companies or people — pool their real estate investment funds into a single pool and then invest in property deals that are typically out of the reach of single investors.
A real estate syndication is made up of General Partners (GPs) and Limited Partners (LPs). The GPs are actively involved in running the Real Estate Syndication and the LPs are passive investors who receive passive income from the syndication.
The investment opportunities in a real estate syndicate are usually made up of commercial real estate deals which typically have much higher returns than other types of real estate.
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There are several differences between syndication and crowdfunding. The main one is that in a syndication you are dealing directly with the sponsor of the investment. You can get to know them personally, understand who they are and their track record. A direct relationship provides more transparency regarding the investment and its operation. However syndications tend to have higher minimums so for many just getting into the real estate space, investing $50,000 is not where they want to start.
Many syndications are private, meaning that they are funded through networks of people that know each other. Meaning that there are syndications being transacted that it can be hard to get access too. Others that meet specific 506(c) requirements can advertise on the internet and people can be made aware.
Real Estate Syndications are not REITs (Real Estate Investment Trusts). A REIT is a specific type of real estate company in which you can buy shares. Legally, you don't actually own real estate but stock in a company.
What is Real Estate Crowdfunding?
Real Estate Crowdfunding is a method of finding investors for a real estate project through online advertising. This tends to occur on the internet through popular crowdfunding platforms such as CrowdStreet or RealtyMogul. These platforms spend thousands if not millions a year in advertising to connect investors with deal sponsors.
With these investments, it is possible to obtain direct ownership of a commercial real estate property as an individual investor, and to invest for as little as $500. The low investment amount is one advantage that Crowdfunding has over Syndications.
Crowdfunding deals can advertise returns of 6% or as much as 400%. Like all investment opportunities, none of these returns are guaranteed. Interested investors should be particularly cautious of deals that hint at unrealistically high returns. Like any investment, perform your due diligence. Look at the underlying fundamentals of the investment to determine if it is really for you.
The second challenge of Crowdfunding can be the distance between the investor and the deal sponsor. On some platforms they want to get your investment and you won’t have a chance to connect with the sponsor. This can create a layer between the investor and the investment and sometimes prevent important interactions.
Crowdfunding became popular after the JOBS Act permitted general online marketing for the sale of certain securities. Before that, the securities laws set by the Securities and Exchange Commission (SEC) didn't allow companies to market certain types of investments to the general public.
Both crowdfunding and syndication let you diversify your investment portfolio more widely because you can spread your equity across investments.
More FAQs about Real Estate Syndication vs. Crowdfunding
Can you lose money with real estate crowdfunding?
Like all investments, real estate crowdfunding has its risks. There is never any guarantee that a real estate crowdfunding deal will bring you returns. Crowdfunding can lose you money, however their minimums tend to be lower.
Investors receive returns in various ways in a crowdfunding deal. It could be in the form of a regular payout every quarter, or a large payout when the property is sold (hopefully) at a profit.
You should never invest more than you are willing to lose.
Investors should always carry out their due diligence on the businesses behind a particular crowdfunding opportunity before diving into any venture. It's vital to understand all the terms involved in any investment. Real Estate crowdfunding doesn't require that participants are accredited investors and so the risk is typically slightly lower, but the risk tolerance of non-accredited investors is also usually lower.
Is real estate syndication profitable?
The profitability of a real estate syndication is largely due to key factors, the price you buy the property, the market and the expertise of its sponsor and their business strategy.
Ideally, there should be regular cash flow from a real estate syndication, in addition to a large payout for investors after the property is sold.
At Wealthward Capital, we have structured all our real estate deals so that they bring in regular cash flow, at least every quarter. These payments are actual returns and not payments from the principal.
This is a completely unique approach to investment objectives in real estate, and we designed it this way at Wealthward Capital to get your money to work for you.
Is real estate crowdfunding a good idea?
Real estate crowdfunding can be a good investment if you do the necessary homework. Similar to the stock market, Real Estate is a popular investment vehicle that can generate plenty of wealth when done properly.
And whereas a real estate syndicate is usually only open to accredited investors, crowdfunding platforms are open to anyone. This democratizes the world of real estate investment for people of any means.
Is real estate crowdfunding risky?
All investments contain some risk, particularly high-return investments. The real estate market has been traditionally a stable market but disasters can and sometimes do happen, such as the 2008 financial crisis.
The great thing about investing in crowdfunding platforms is that the initial outlay doesn't have to be too high. You pool your capital with other investors and are thereby able to invest in high-yield commercial properties.
How much do real estate crowdfunders make?
Every real estate crowdfunding project has its investment objectives. How they achieve those objectives depends very much on the skill of the person(s) managing the investment.
Investors in crowdfunding projects usually make regular returns and then receive a lump sum return after the property is sold.
You will need to pay capital gains tax on the gains after the property is sold.
How do real estate crowdfunders make money?
A crowdfunding platform will charge fees for various services, including advisory and sales fees. As for the investors, they usually receive returns for rental properties, and then a larger return when the property is sold.
The quantity and frequency of investor returns have very much to do with the skill of the deal sponsor. Crowdfunding deal sponsors tend to be a little less transparent than syndication deal sponsors, although these are certainly exceptions.
At Wealthward Capital, we generate regular payouts through rental incomes, property appreciation, and other means.
Are real estate syndications worth it?
The quality of a real estate syndicate depends very much on who is running it. It all comes down to how well the property management is carried out. Well-managed properties increase in value and generate regular payouts.
At Wealthward Capital, we have gone to enormous lengths to ensure that our real estate syndication projects are always cash-flowing.
What are the three phases of syndication?
There are three phases to any real estate syndication project:
- Origination
- Operation
- Liquidation
This represents the full cycle of looking for a project, acquiring it, managing it, and then exiting successfully.
The origination phase is when the sponsor does all necessary due diligence to research a project and let potential investors know about it. The project also needs to be registered and disclosed.
The operation phase covers all the day-to-day activities the sponsor undertakes to increase the property's value and also generate regular income for passive investors. One common operations activity is to refurbish the property.
The liquidation process is all about selling the property for a higher amount than it was purchased for. Investors are then paid their returns and will pay capital gains tax on them. The amount they pay depends on (a) how much they earned and (b) how long the property was held. Properties held for less than 12 months get taxed as short-term capital gains and properties held for more than 12 months are taxed as long-term capital gains.
If the sponsor cannot get a good deal in the liquidation phase, they might refinance the property and return to the operations phase to increase the property's value.
What is a good return for a real estate syndication?
Some investment companies feel that 7% is a good return for real estate syndication but we feel that 9% and even 10% are more in line with what investors should hope to get.
Achieving cash-on-cash returns of 10% is not impossible. Wealthward Capital has three properties on its portfolio that are currently doing at least that much, with high equity multiples. And one of our recently sold properties ended off with a 10% cash-on-cash return.
Our ATM fund is currently bringing in returns of 22.4%.
What is the 50% rule in real estate?
The 50% rule is a rule of thumb that says that an investor should expect the operating expenses of a property to be around 50% of its gross income. This is an important figure for sponsors to know but not really for passive investors.
The whole point of passively investing in real estate, whether through crowdfunding or syndication, is that you aren't involved in the day-to-day affairs of managing a property. This duty is given to a sponsor who will bring in the necessary expertise as needed to ensure that the property is profitable.
By definition, a passive investor cannot be materially involved in a property's day-to-day running otherwise the income generated by the property will not be considered passive income. This would put the investor at a distinct disadvantage because one of the greatest benefits of real estate investment is that passive losses can offset passive income and thereby reduce an investor's overall taxable income.
Wealthward Capital can help you invest in high-return Real Estate Syndications
I built Wealthward Capital to help tech employees get out of the "Golden Jail" where you earn good money but somehow can't get off the endless treadmill. My solution was to find a way to make that money work for me.
And I eventually did find a way. Wealthward Capital has successfully created a portfolio of real estate syndication opportunities that bring regular cash-on-cash return to the right investors.
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