As real estate syndication grows in popularity, investors are looking for more information on how it works and the benefits it can provide.
For anyone who’s not yet familiar with the concept, real estate syndication is an investment strategy in which funds are pooled from multiple investors for a specific real estate project, which is professionally managed by a real estate syndication sponsor.
Our guide to real estate syndication provides a detailed look at how syndication works. You can also find useful comparison guides like real estate syndication vs REITs and real estate syndication vs crowdfunding to help you decide if syndication is the better investment vehicle for you.
But in this article, we’re going to focus on the pros and cons of real estate syndication, outlining all the benefits you can expect from this interesting investment model, as well as the potential downsides that you should be aware of.
Pros of Real Estate Syndication
There are many benefits of investing in real estate syndication; here are 10 of the greatest advantages offered by this investment model.
1. Access to Unique Deals
Because syndication deals are scouted and vetted by real estate analysts, you can gain access to unique deals with high return potential by working with a syndication company. And, just as importantly, by pooling money with other investors, you can invest in larger deals than you’d be able to on your own.
Take multi-family developments in Los Angeles, for example. Even “affordable” developments in this high-value market require substantial amounts of capital upfront. Funding a project like this as an independent investor is cost-prohibitive. But by leveraging capital from other investors, the investment amounts are dramatically reduced.
It’s also important to note that syndication investors have deal-by-deal control over their investments (as opposed to investing in an entire fund or portfolio of properties). This means that investors can view the details of their investment property options, including the specific address and projected financials, before selecting which project(s) to invest in.
2. Ease of Investing
With real estate syndication, it’s possible to invest in real estate online! Traditional real estate investing can be overwhelming. You have to analyze dozens of properties to find a suitable one, secure financing and navigate the purchase process, oversee the renovations, etc. But with syndication, you simply create your online account, select your investment property, and wire your investment funds to the syndication sponsor.
This online investing option makes it easy for out-of-state investors to access markets with greater potential than they can find in their local market.
Real estate syndication companies can invest in any type of real estate development. You could, for example, choose to invest in short-term fix-and-flips for quick returns, or long-term rentals for recurring rental income.
The comparatively low investment minimums and flexible offerings also make it easy to diversify your portfolio with syndication. The low investment minimums allow you to spread your investment capital across multiple projects, rather than going all-in on one project. And with the different property types available through syndication (like single-family vs. multi-family properties), you can create a well-balanced portfolio of properties quickly.
5. Passive Income Potential
One of the greatest benefits of investing in rental properties is the cash flow potential. In traditional rental property investing, the owner or property manager is required to actively maintain the property, along with managing other property management challenges like collecting rents and keeping vacancy rates low by finding solid tenants. But with syndication, all property management is overseen by the syndication sponsor, freeing the investor to receive purely passive cash flows from any rental income.
6. Leveraging Professional Expertise and Connections
Investing in a real estate development as an independent investor doesn’t only require excessive upfront capital; it also requires extensive knowledge and an expansive network of real estate and construction professionals. But when you invest with a syndication company, you can leverage their expertise and their connections to minimize risk and maximize return potential.
7. Economies of Scale
Individual investors are severely limited in the number of deals they can do because their time, energy, and capital are limited. But syndication companies can complete dozens of deals per year. And this gives syndication investors the advantage of working with economies of scale. Completing deals in bulk gives syndication companies perks like better interest rates, lower property management fees, and bulk-rate materials for construction.
All these savings contribute to lower expenses and increased returns for investors.
8. Tax Benefits
Several real estate syndication tax benefits are available to syndication investors, including:
- Depreciation deductions as the structure ages,
- Lower capital gains tax rates on long-term investments, and
- Mortgage interest deductions for financed properties.
9. Competitive Return Potential
Thanks, in part, to many of the benefits we’ve already discussed, syndication investments can offer an impressive ROI, particularly when well managed by a reputable syndication company. Gatsby Investment, for example, averaged an annualized return of 24.22% for investors from 2017-2022!
10. Stable Ownership Structure
With syndication, investors benefit from being members of the ownership entity for the property. This means that equity investors have an ownership stake in the underlying real estate (as opposed to debt investors, who simply own a share of the property’s debt).
Cons of Real Estate Syndication
Of course, no investment model is free from risk. Here are the five potential downsides of real estate syndication investing.
1. Lack of Direct Control
While you do have deal-by-deal control in real estate syndication, you don’t have control over the direction of the project. You cannot, for example, decide how the completed structure will be laid out or designed. This represents a lack of control when compared to traditional real estate investing, in which an individual owner has complete control over those details.
And, while leveraging the expertise of your syndication sponsor can result in higher yields than you could earn alone, the lack of control could create the potential for mismanagement if your sponsor is less experienced.
2. Limited Exit Strategies
Most syndication projects require that investors commit their funds for a designated time frame. Unlike shares in publicly-traded REITs, which can be bought and sold on the stock exchange, shares in a syndication project are typically non-transferable. This creates a level of illiquidity in syndication as compared to REITs. It is worth noting, however, that syndication is still more liquid than traditional real estate investments.
3. Vulnerability to Market Shifts
As with most investments, syndication is subject to changing market conditions. If, for example, the housing market sees a downturn, returns will typically be lower than they would be in a growing market.
Smart syndication firms understand this economic downturn vulnerability and actively focus on areas of high demand. For example, despite the general stagnation in the Los Angeles single-family housing market, there is still high demand for properties ADUs (accessory dwelling units). Gatsby has capitalized on this demand by including ADU builds in their home flip projects.
4. Tax Complexity
While there are several tax benefits of investing in syndication, some of the traditional tax benefits of real estate investing may not apply. Or they may apply differently than if you were to invest yourself. For example, most syndication companies are not equipped to handle 1031 exchanges. You may need to seek the help of an income tax professional to complete your income tax filings when benefiting from syndication income.
5. Risk of Financial Losses
While the risk of financial losses is lower with syndication than with many other investment models, financial risk is a factor in most investments. And syndication is not exempt. The risk of loss is typically offset by the increased reward potential. But investors should still practice due diligence by reviewing the financial projections of any property they are considering investing in.
Invest in Real Estate Syndication with Gatsby Investment
Choosing a strong syndication company is critical to the success of your real estate syndication investments. Gatsby Investment is a California-based syndication company, specializing in residential property in Los Angeles. With an impressive track record and over 10,000 trusted members, Gatsby is among the elite syndication companies in the world.
Learn more about investing in real estate syndication with Gatsby Investment, and review Gatsby’s available investment opportunities today.