Real estate syndication and private equity funds are similar investment vehicles, in that they both rely on real estate crowdfunding to raise capital from multiple investors. But there are several differences to note when comparing real estate syndication vs. private equity. Understanding these differences can help you decide which investment strategy is the best fit for your long-term investment goals.
What Is Real Estate Syndication?
Real estate syndication is when multiple investors form a legal partnership with the sponsor of a specific real estate project. For a complete breakdown of how syndication works, check out our article, Real Estate Syndication Explained.
What Is Private Equity?
In traditional investing, private equity is a general term used to describe a partnership between private parties for the purpose of buying assets, managing them for a period, then selling them. The asset classes could include companies, real estate developments, or infrastructures. This article will focus on private equity real estate projects to draw more clear comparisons between private equity and real estate syndication.
The “private” nature of private equity funds means that they are not made available to the general public according to SEC regulations; you typically need to have established relationships with other investors and or private equity fund managers to join this type of fund. For this reason, private equity is typically categorized as a high-net-worth investing strategy.
Key Similarities Between Syndication and Private Equity
Whether you choose to invest in real estate syndication or private equity real estate deals, you’ll see several of the same benefits and a few of the same risks from both investing strategies. Here are the key similarities between investing in syndication and private equity.
- Multiple investors. In both cases, funds are pooled from multiple investors to finance the project(s). This is beneficial for investors because it allows them to access high-value deals by putting down a low upfront amount of capital. Having said that, the upfront investment required may still be $10,000 or more. This is high compared to many other investment types, by low compared to the amount of capital required to fund a similar project on your own.
- Passive cash flow potential. When investing in income-generating real estate, the rental income should flow through to the investors in both syndication and private equity.
- Appreciation potential. As real estate assets organically appreciate over time (or as investors force appreciation through value-add projects) investors of both syndication and private equity should see the financial benefit of the appreciation when the asset is sold for a profit.
- Tax advantages. There are several tax benefits to investing in real estate. For example, whether you invest in private equity or syndication, you should be able to claim depreciation deductions for the structures on your income tax returns.
- Expert management. Both options offer investors the opportunity to leverage the skill, knowledge, and network of real estate professionals in building a real estate portfolio. You can become a syndicate investor or a real estate fund investor with no real estate investing experience.
Key Differences Between Real Estate Syndication and Private Equity
There are several key differences between real estate syndication and private equity to consider before choosing your investment strategy.
- Syndication is done on a deal-by-deal basis. This means that you, as the real estate investor, get to choose exactly which project(s) you want to invest in. A syndication company cannot take the funds you invested in one property to finance another property.
- In private equity, capital is pooled for the whole fund. This means that your investment amount is put in an account that can be shared between any (or all) of the properties owned by the fund. You do not get to decide which property your funds go toward. In fact, the fund may buy or sell properties without your consent. In this way, private equity works more like a Real Estate Investment Trust (REIT). REITs are companies that invest in income-generating real estate and pass the rental income along to investors as dividends. This makes both REITs and private equity examples of “whole fund” investing. Learn more about whole fund vs deal-by-deal investing.
- Syndication is generally more transparent. Because investors get to decide which specific properties to invest in under syndication, there are many more details made available to investors. With a good syndication company, you’ll be able to see the address, project plans, and property details before investing. This is very different from fund investing, in which you are given very few details with which to carry out any due diligence.
- Private equity may carry less risk due to diversification. One benefit of investing in a fund is that your investment is automatically diversified among the fund’s holdings. If, for example, the fund holds commercial real estate that is performing poorly and multi-family rentals that are performing well, the rentals would offer some protection from the commercial investment. In this case, investing in a fund would provide favorable returns compared to investing in only that commercial property. Although investing in the fund would provide less favorable returns than investing in only that multi-family property.
- Syndication can have greater return potential. Since syndication doesn’t provide the automatic diversification of private equity, it can be seen as having a slightly higher risk level. This higher risk is typically rewarded with higher returns. If you would prefer to diversify your syndicated investment, you could spread your investment capital across multiple syndication projects.
Invest in Real Estate Syndication with Gatsby Investment
Gatsby Investment is a California-based real estate syndication company, specializing in strategic residential real estate investments in the Los Angeles area. Our experienced real estate analysts focus on generating high yields, even under slowing market conditions. In the cooling market of 2023, for example, we are seeing returns of over 20% on house flips with ADU additions and multi-family developments designed for today’s co-living renters.