Real Estate Syndication vs. Crowdfunding

By The ArborCrowd Team
Sep 10, 2020

Many people aren’t sure of the difference between real estate syndication and crowdfunding. The terms are closely related, and both are associated with investing in institutional real estate deals, but they are not synonymous. Real estate syndication refers to the funding structure and funding relationships between the investors and the deal sponsor. Crowdfunding, on the other hand, is one method that sponsors can use to find those investors.

What is Real Estate Syndication?

Real estate syndication is the process of forming a group of investors to invest in a real estate deal together. It’s essentially a type of funding relationship. By pooling their resources and working with a syndication sponsor, investors can participate in bigger deals than they could afford on their own, without the hassles of finding and managing a property themselves. Typically, the sponsor makes most of the decisions about the property, from selecting the best opportunity to managing the day-to-day operations of the investment after the property has been purchased.

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What is Real Estate Crowdfunding?

Real estate crowdfunding refers to a specific method of connecting investors with a real estate syndicate, where investors use an online platform to discover and learn about opportunities to passively invest in real estate.

There are many forms of investment crowdfunding, but real estate crowdfunding has become extremely popular with investors since it was introduced in 2012.

The Pros and Cons of Real Estate Crowdfunding

Real estate crowdfunding can be a great opportunity, but it’s important to understand how it compares to other investment options so you can be sure it’s right for you.

If you currently invest primarily in stocks, bonds, and other publicly traded securities, then real estate crowdfunding is one way to diversify your portfolio. Crowdfunding typically has a lower minimum investment than many other forms of real estate investing, such as private equity funds or direct ownership. This enables investors with a moderate amount of capital to participate in bigger deals.

Investing directly in real estate can offer strong returns. However, most people lack experience with managing large properties, which makes it much simpler and easier to invest passively in real estate. With crowdfunding, property management and maintenance are all handled by the deal sponsor. That means you don’t have to deal with finding and evicting tenants, maintaining the property, or any of the extra administrative and legal work and required to set up a real estate deal.

In addition, crowdfunding platforms can offer a diverse range of property types. Typically, investors can choose from different types of real estate, such as multifamily or industrial properties, as well as properties in different geographic locations. Real Estate Investment Trusts (REITs) and similar investments often focus on a single type of property.

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Transparency is another major benefit of real estate crowdfunding—as long as you select the right platform—with some providing specific information about each property. ArborCrowd even offers virtual video tours of the properties they are offering for investment. This transparency allows investors to choose a deal that matches their risk profile and goals. A reputable crowdfunding platform will also share information about the sponsor or operating partners, so you can learn more about their experience and areas of expertise.

The main disadvantage of investing in real estate is that it is usually less liquid than investing through the stock market. Crowdfunding platforms normally have a target investment period for each deal, so investors may have to hold onto their investment for anywhere from 18 months to five years or more, depending on the platform and deal they choose.

While it’s now easier than ever to make a smaller investment in a real estate deal through crowdfunding, investors must still be accredited and meet the minimum income or asset standards for some investments.

And finally, since real estate crowdfunding is a relatively new way of investing, it can attract irresponsible, unreliable sponsors — or in the worst case, scammers. Also, some crowdfunding platforms are managed by sponsors with limited experience in large real estate transactions.

Choosing the Right Crowdfunding Platform

When you’re looking for a crowdfunding platform, make sure that the leadership team has experience in the types of real estate transactions that you want to participate in. Real estate deals require more active management than other types of investments, so the team’s background and skill are especially important. You want real estate experts with a history of successful projects behind them.

In addition, it’s critical to work with a team that has deep expertise in underwriting, which enables them to select the best available deals on the market. You can learn more about ArborCrowd’s disciplined deal selection process and strict approach to underwriting in this video featuring Chris Moser, Director of Acquisitions; Neil Patel, Director of Investor Relations; and Chris Forte, Director of Asset Management.

Many crowdfunding platforms have been founded by technology entrepreneurs and are backed by venture capitalists. Often, these entrepreneurs have more experience building the technology platform than managing real estate assets. In addition, many of these platforms are beholden to the venture capitalists that fund their endeavors, and they may be more inclined to keep those funders happy even over the best interests of the people who invest in their deals.

With more than 30 years of real estate experience as part of The Arbor Family of Companies, ArborCrowd is uniquely positioned in the real estate crowdfunding space. As the first crowdfunding company launched by a real estate institution, ArborCrowd has a sophisticated understanding of the real estate space and a wealth of industry relationships to draw upon.