Crowdfunding has exploded in popularity with the rise of GoFundMe, Kickstarter, and other sites that allow people to invest in causes they care about. If you’re a crowdfunding fan, we have good news for you.
Real estate syndication is crowdfunding’s cousin, and it could be a way for you to make investments in real estate using the power of group funding.
What is Crowdfunding vs. Real Estate Syndication?
If you’ve ever participated in any type of group funding, you’re already on your way to exploring the world of real estate syndication. The central idea behind both is the same: people come together to invest in something bigger than what they could do alone.
Crowdfunding uses small amounts of capital from a large number of investors to finance a new product, service, or venture. The phenomenon is raising $17.2 billion annually in North America and the typical crowdfunding campaign has an average of 47 backers.
Real estate syndication is a lot like crowdfunding a property purchase. Here is the definition of real estate syndication and how it works.
The Basics of Real Estate Syndication
Real estate syndication is when investors work with a sponsor who locates and manages lucrative real estate projects. There is usually a minimum investment required and later, as the property becomes profitable, investors receive payments according to the terms of their agreement with the sponsor.
The individual investor needs no special real estate or financial knowledge because the sponsor puts their intellectual capital to work for the group. A talented, experienced syndication sponsor knows how to locate certain properties with a high potential for value-building, which is typically accomplished through remodeling, rebranding, and attracting new tenants or buyers.
Real estate syndication is a form of passive investing because investors contribute money but not too much time or effort. In an ideal scenario, the sponsor finds a property, the investors make their contributions to the project, the sponsor manages value-building, then everyone receives payment disbursements at intervals.
To give you an idea of the popularity of real estate syndication, in 2019, about 120,000 U.S. investors participated in real estate syndication with an average investment size of $3 million and an average preferred return of 8%.
Now, some experts are predicting that interest in syndication may expand to one million participants or more in post-COVID times as the need for affordable housing expands.
As far as the size of the investment, it varies. You can get started in real estate syndication with just a few thousand dollars, but the average project is worth about $3 million. At Life Bridge Capital, our typical minimum investment is $50,000 and our average project value is $25 million to $35 million.
Differences Between Crowdfunding and Real Estate Syndication
There are some notable differences between crowdfunding and real estate syndication. For one thing, a syndication agreement is a formal funding relationship among investors while general crowdfunding is more of a method of finding investors.
The most general form of internet crowdfunding locates potential investors and has the primary function of educating them about an investment opportunity if they wish to take part in it. Real estate syndication formalizes a business relationship between each investor and a sponsor who coordinates the project, thereby creating a group of investors who are committed to funding an investment.
Another difference is that crowdfunding often happens more informally through a blog or website like GoFundMe, while real estate syndication typically occurs in a more professional setting. The investor meets with the sponsor in person, over the phone, or through emailed/written business communications, reflecting the more formal nature of the relationship.
Getting even more specific, real estate crowdfunding is a particular type of crowdfunding that is more similar to real estate syndication but is still not exactly the same. The most notable difference is in how profits are distributed.
In real estate crowdfunding, profits typically arise from rental income or the appreciation on a property at sale. There is often a target date for exit, meaning the crowdfunder will eventually leave the investment – hopefully, at a profit and not at a loss.
Real estate syndication usually operates in a waterfall structure and distributes profits at set intervals as time goes by. The waterfall structure is the gold standard of structures in real estate syndication and is explained in more detail in our whitepaper, A Guide to Passively Investing in Commercial Real Estate.
What Crowdfunders Love About Real Estate Syndication
The benefits of crowdfunding and real estate syndication are what makes them both so intriguing to so many people. Here are some of the benefits of real estate syndication that may appeal to you:
- It brings investors together for a common cause.
- It allows you to pick and choose your projects.
- It leverages the resources of a knowledgeable sponsor.
- It’s a longer-term approach to investing that yields modest but reliable returns.
- Because it’s a passive form of investing, you can focus on other things in your life.
Just like when you contribute to a crowdfunding project, investing in real estate syndication allows you to make a financial decision and then move on with your life. You don’t have to babysit your investment and interact with it day-to-day the way you would with flipping a house or becoming a landlord, for example.
And for many people, that’s enormously attractive. When you’re already busy with work, a family, and everything else, passive real estate investment provides a smart, resource-effective path to building wealth.
How to Learn More About Real Estate Syndication
If property investment through real estate syndication is starting to sound interesting, download our free whitepaper, A Guide to Passively Investing in Commercial Real Estate. You can also check out our podcast, The Real Estate Syndication Show.