Weighing The Pros and Cons of Setting Up a Real Estate Fund or Syndication

June 20, 2024
Shams Merchant

Real estate investment is a time-tested strategy for building wealth, and two popular methods suggested by a professional real estate fund formation attorney for pooling resources are real estate funds and syndications. Both offer opportunities for investors to diversify their portfolios and access larger deals they might not be able to pursue on their own. However, each approach comes with its own set of pros and cons.

Let’s delve into the intricacies of real estate funds and syndications to help you make an informed decision about which avenue is best suited to your investment goals.

Real Estate Funds

Real estate funds are investment vehicles that pool capital from multiple investors to purchase a diversified portfolio of properties. These funds can take various forms, including mutual funds, exchange-traded funds (ETFs), or private equity funds. Here are some of the pros and cons of investing in real estate funds:

Pros

  • Diversification – One of the most significant advantages of investing in a real estate fund is diversification. By pooling resources with other investors, you gain exposure to a broader range of properties across different markets, asset classes, and geographies. This diversification can help mitigate risk and reduce the impact of any one property underperforming.
  • Professional Management – Real estate funds are typically managed by an experienced 506(c) and 506(b) lawyer who specializes in property acquisition, management, and disposition. These professionals conduct thorough due diligence on potential investments and actively manage the properties to maximize returns for investors. As a passive investor, you can benefit from their expertise without having to oversee the day-to-day operations yourself.
  • Access to Institutional-Quality Deals – Real estate funds often have access to institutional-quality deals that may not be available to individual investors. These deals may include large-scale commercial properties, development projects, or distressed assets that require significant capital and expertise to acquire.

Cons

  • Lack of Control – When you invest in a real estate fund, you’re relinquishing control over the investment decisions to the fund manager. While this can be advantageous if you prefer a hands-off approach, it also means that you have limited input into which properties are acquired or sold.
  • Fees and Expenses – Real estate funds typically charge management fees, performance fees, and other expenses, which can eat into your returns over time. It’s essential to carefully review the fee structure before investing to ensure that it aligns with your investment objectives.
  • Market Correlation – Like other types of investments, real estate funds are subject to market fluctuations and economic downturns. While diversification can help mitigate some of this risk, there is still the potential for losses if the overall real estate market experiences a downturn.

Real Estate Syndications

Real estate syndications involve pooling resources from multiple investors to acquire a specific property or portfolio of properties. Unlike real estate funds, which invest in multiple properties, syndications focus on individual deals. Here are some of the pros and cons of investing in real estate syndications:

Pros

  • Direct Ownership – One of the primary advantages of real estate syndications is that investors have direct ownership in the underlying property. This direct ownership gives investors more control over the investment decisions, such as property management, renovations, and exit strategies.
  • Potential for Higher Returns – Since real estate syndications typically focus on specific properties, investors have the potential to earn higher returns compared to investing in a diversified real estate fund. By selecting high-quality deals with strong growth potential, syndications can offer attractive risk-adjusted returns.
  • Tax Benefits – Real estate syndications, when undertaken under the guidance of a professional real estate syndication attorney, offer various tax benefits, including depreciation deductions, pass-through income, and the ability to defer capital gains through 1031 exchanges. These tax advantages can enhance overall returns and provide investors with additional income and wealth-building opportunities.

Cons

  • Higher Risk – Investing in real estate syndications involves higher levels of risk compared to investing in a diversified real estate fund. Since syndications focus on individual properties, investors are exposed to specific market, location, and asset-specific risks that may impact the performance of the investment.
  • Illiquidity – Real estate syndications typically have longer investment horizons and limited liquidity compared to real estate funds. Once you invest in a syndication, your capital is tied up for the duration of the investment, which can range from several years to a decade or more.
  • Active Involvement – While some investors may see direct ownership as an advantage, others may view it as a disadvantage due to the active involvement required in managing the property. Syndications often require investors to participate in decisions related to property management, leasing, and capital improvements, which may not appeal to passive investors.

Conclusion

Both real estate funds and syndications offer unique opportunities for investors to gain exposure to the real estate market and diversify their portfolios. Shams Merchant is a specialized attorney at a leading real estate private equity law firm CRE Lawyer. He can help you weigh the pros and cons of each approach, which is essential to consider factors such as investment objectives, risk tolerance, and investment horizon. Ultimately, the right choice depends on your individual preferences and goals as an investor. By carefully evaluating the advantages and disadvantages of real estate funds and syndications, you can make an informed decision that aligns with your financial needs and aspirations.