Like any investment avenue, real estate syndication comes with its set of advantages and drawbacks. On the upside, it may present a number of benefits such as enhanced overall portfolio diversification, access to potentially advantageous real estate deals, and the allure of potential passive investment.
On the flip side, it may pose challenges like limited control over your asset's trajectory and extended investment horizons, among other considerations.
Let's explore some of the real estate syndication pros and cons you may encounter as you conduct due diligence for your upcoming prospective investment.
Tip: Interested in learning more about real estate syndications? Check out the official CrowdStreet Guide to Real Estate Syndications
Real Estate Syndication Pros
Potential for Diversification
Keep in mind that real estate syndications typically offer lower investment minimums compared to traditional real estate investment opportunities, like, for example, purchasing a single-family home and renting it out to a tenant.
Syndications provide investors with the opportunity to spread their capital across multiple properties or projects, thereby potentially enhancing the diversification of their real estate allocation within their larger investment portfolio.
Access to Larger Real Estate Projects
Syndications can provide individual investors with the opportunity to participate in larger real estate deals that would traditionally be out of reach for a single investor. For instance, undertaking the financing and development of a large hotel independently may be a formidable task for most individuals, but by participating in a syndication, investors have the potential to participate in such projects.
Passive Investment with Professional Management
Investors can enjoy some of the benefits of real estate investment without the hassles of day-to-day management, as syndicators handle property acquisition, development, and management.
Potential Tax Advantages and Distributions
As we mentioned earlier, syndications may offer numerous tax benefits, like depreciation and mortgage interest deductions. Although it's important to remember tax aspects of such investments can be complex and may differ depending on the property or offering and on individual tax circumstances. Neither CrowdStreet or its affiliates offer tax or legal advice. Investors are strongly encouraged to seek advice from qualified tax professionals and/or legal experts regarding the tax consequences based on their particular circumstances.
Additionally, investors may receive regular distributions from property income, however distributions are not guaranteed.
Real Estate Syndication Cons
Limited Control Over Investment Decisions
Investors in syndications typically have limited say in the operational and strategic decisions related to the property, which are primarily made by the syndicator or general partner.
Illiquidity and Longer Investment Horizons
Real estate investment syndicates, and the assets they hold, are illiquid, with capital committed for several years. Investors should be prepared for longer investment horizons and limited options for early exit.
Need for Due Diligence and Thorough Evaluation of Syndicators
The success of a syndication partially depends on the competence and integrity of the syndicator, or sponsor. Investors must conduct thorough due diligence to assess the track record, experience, and transparency of the syndicator.
Potential for Conflicts of Interest and Management Fees
There may be instances where the interests of the syndicator and the investors diverge, leading to potential conflicts. Additionally, management fees and profit-sharing arrangements should be carefully scrutinized to ensure alignment with investor interests.
Real Estate Syndication Pros and Cons: The Bottom Line
Every investment carries its own set of dynamics and ensuring that the asset aligns with your personal risk-reward profile and your desired investment timeline is crucial.
Put another way: your ideal investment might not be someone else’s, and vice versa. It’s imperative to perform rigorous due diligence, and to fully understand the foundational concepts behind said investment, whether that’s poring over Intel’s latest quarterly report or taking a trip to a potential new syndicated multifamily development.
If you’re still interested in learning more about real estate syndication opportunities, check out CrowdStreet’s comprehensive guide to real estate syndication investing.
CrowdStreet, Inc. (“CrowdStreet”) offers investment opportunities and financial services on its website, the CrowdStreet Marketplace ("the Marketplace"). CrowdStreet offers broker dealer services through CrowdStreet Capital LLC (“CrowdStreet Capital”), a registered broker dealer, Member FINRA/SIPC.
This article was written by an employee(s) of CrowdStreet and the contents of this publication are for informational purposes only. Neither this publication nor the financial professionals who authored it are rendering financial, legal, tax or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to any person constitute an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. The views and statements expressed are based upon the opinions of CrowdStreet. All information is from sources believed to be reliable. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance or success. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. CrowdStreet assumes no liability in connection with the use of this publication. An investment in a private placement is highly speculative and involves a high degree of risk, including the risk of loss of the entire investment. Private placements are illiquid investments and are intended for investors who do not need a liquid investment. No guarantee or representation is made that a project will achieve its investment objectives or that investors will receive any return on their investment. Investors should consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. All investors should review the offering's documents carefully before investing.
All information, content, and materials referenced in this memo are for general informational purposes only. This memo may contain links to other third-party websites. Such links are only for the convenience of the reader and CrowdStreet nor its affiliates do not recommend or endorse the contents of the third-party sites. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the subject thereof. All projections, forecasts, and estimates of returns or future performance, and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions.