Real estate syndication and crowdfunding are similar models of investing in real estate projects. And because the modern iteration of these models has only been around since the JOBS Act of 2012 (learn more about how the JOBS Act changed real estate), there is a lot of confusion around real estate syndication vs. crowdfunding.
What is real estate crowdfunding? Real estate crowdfunding is a general term for raising capital from multiple members of the general public to fund a specific real estate investment. (You can click the link for a complete definition, including how real estate crowdfunding works.)
What is real estate syndication? Real estate syndication is a specific term for the partnership between the multiple investors and the real estate project’s sponsor. (You can click the link for a complete definition, including how syndication works.)
So, crowdfunding and syndication are both forms of real estate investments that are offered to the general public and allow multiple investors to join funds and share in any returns. Ok, then what is the difference between crowdfunding vs. syndication? That’s the question we’re going to answer with this article. But first, we need to take a closer look at the similarities.
Similarities Between Real Estate Syndication and Real Estate Crowdfunding
Here are the many ways in which real estate syndication and crowdfunding are similar:
- Deal Sponsors. Crowdfunded deals and syndication deals both have sponsors, who are responsible for the success of the project. There are several factors to consider when choosing your crowdfunding or syndication sponsor; it’s important to only invest with a company that you trust to produce strong results.
- Low minimum investments. Pooling funds from a group of investors, allows crowdfunding and syndication platforms to offer lower upfront investments. For example, funding a multi-family development as an individual investor could easily require over a million dollars. But with crowdfunding and syndication, you could buy a share of a multi-family development for just $5,000-$50,000 (depending on the project and the project’s sponsor).
- Diversification potential. Because of the low minimum investment amounts, you can choose to spread your funds across multiple projects. This adds diversification and strengthens your investment portfolio as a whole.
- Flexible project offerings. Crowdfunding and syndication can both offer a wide range of real estate deals, from short-term single-family house flips to long-term multi-family rentals.
- Passive return potential. Because these projects are managed by sponsors, you don’t have to do any of the legwork. Your sponsor will vet potential deals, secure the property, supervise construction, and manage the project for you. Whether you get a one-time payout from the sale of the property or regular payments from rental income, your returns are completely passive.
- Online platforms. Both models rely on online crowdfunding platforms to match investors to projects (the term “crowdfunding platform” is commonly used for both crowdfunding and syndication companies). These platforms make it easy for investors to invest in real estate online.
Differences Between Real Estate Syndication and Real Estate Crowdfunding
Now we can explore the differences between crowdfunding and syndication.
- Syndication offers a more stable ownership structure. The primary difference between real estate syndication vs crowdfunding is the partnership between the sponsor and the investors. In crowdfunding, this relationship is often unclear. Is the investor just lending money to the sponsor? Does the sponsor have any stake of their own in the investment? Is there a legally binding contract to hold the sponsor responsible to investors? Syndication, on the other hand, means that all investors in a given project will join the sponsor as members in a newly-formed legal entity (typically an LLC or Trust), created for the sole purpose of this investment. Essentially, each investor shares ownership in this new business entity, which confirms their legal rights to any proceeds from the project.
- Syndication is more likely to offer equity. A real estate investment offers either debt ownership or equity in the property. For debt investments, the investors act as the bank, lending money without getting any ownership. For equity investments, investors own a share of the underlying real estate. While crowdfunding companies can offer equity, they typically stick to debt because it’s easier for the sponsor to manage. Syndication companies are more likely to offer equity, which is typically preferred because it allows investors to take advantage of more of the tax benefits of real estate investments.
- Crowdfunding is more likely to offer lower investment minimums. In general, the average crowdfunded project has more individual investors than the average syndication project. This allows crowdfunded projects to offer lower minimum investment amounts by spreading the capital requirement among more investors.
- Crowdfunding is more likely to offer whole fund investments rather than deal-by-deal investments. Syndications can offer whole fund investments (in which you invest in a whole portfolio of properties rather than a single property). Still, you’re more likely to find whole fund investing in crowdfunding. Whole fund and deal-by-deal investments each have their pros and cons, but this is something to be aware of if you favor one strategy over the other.
- Syndication is more likely to require accreditation. According to the SEC, real estate investment companies that actively market their specific projects to the public can only accept accredited investors(investors who have a high enough net worth or income - learn more about real estate investing for accredited investors). Companies that don’t promote their offerings to the general public, opting instead to share specifics privately with interested investors, can accept non-accredited investors. It may be possible to find companies that work with nonaccredited investors in both crowdfunding and syndication. However, in general, syndication projects are more likely to require accreditation.
As you can see, there is a lot of crossover between syndication and crowdfunding. Even the differences aren’t always clearly defined; one model is just “more likely” to work a certain way than the other model.
Which Is Better: Real Estate Crowdfunding or Syndication?
One method is not inherently better than the other. The pros and cons of real estate crowdfunding are similar to syndication, so it’s more about deciding which option works best for you at this point in your life as an investor.
If a stable structure and ownership of the underlying real estate are important to you, syndication is likely the better fit. If you are unaccredited or are looking for extra-low minimum investment options, crowdfunding might serve you better.
Having said that, it’s generally a good idea to focus on the company offering the investment and the project itself, rather than stressing about whether an investment is technically crowdfunding vs syndication. The fact is, these terms are both still fairly new, and they are often misused.
Finding a trustworthy company with a strong track record of profitable deals is more important than drawing a hard line between crowdfunding and syndication.
Invest in a Real Estate Syndicate with Gatsby Investment
Gatsby Investment is a California-based real estate syndication company with an exceptional track record of success. Trusted by over 8,500 investors, Gatsby has never lost money on a deal. In fact, our annualized average from 2017-2022 is 24.22%!
We offer a wide range of real estate investment opportunities to suit both long-term and short-term investors. Each deal is hand-selected from hundreds of deals considered by our experienced analysts. And our team of experts handles the day-to-day management of each real estate deal, maximizing your return potential and minimizing your risk exposure.
Gatsby proudly offers equity ownership to accredited investors and facilitates investments through our easy-to-use online platform. We also pride ourselves on transparency, publishing proformas and providing progress updates to investors throughout the term project.
Take advantage of the many benefits offered by both real estate crowdfunding and syndication with Gatsby Investment.