Like any investment avenue, real estate syndication comes with its set of advantages and drawbacks. On the upside, it may present a number of benefits such as enhanced overall portfolio diversification, access to potentially advantageous real estate deals, and the allure of potential passive investment.
On the flip side, it may pose challenges like limited control over your asset's trajectory and extended investment horizons, among other considerations.
Let's explore some of the real estate syndication pros and cons you may encounter as you conduct due diligence for your upcoming prospective investment.
Tip: Interested in learning more about real estate syndications? Check out the official CrowdStreet Guide to Real Estate Syndications
Potential for Diversification
Keep in mind that real estate syndications typically offer lower investment minimums compared to traditional real estate investment opportunities, like, for example, purchasing a single-family home and renting it out to a tenant.
Syndications provide investors with the opportunity to spread their capital across multiple properties or projects, thereby potentially enhancing the diversification of their real estate allocation within their larger investment portfolio.
Access to Larger Real Estate Projects
Syndications can provide individual investors with the opportunity to participate in larger real estate deals that would traditionally be out of reach for a single investor. For instance, undertaking the financing and development of a large hotel independently may be a formidable task for most individuals, but by participating in a syndication, investors have the potential to participate in such projects.
Passive Investment with Professional Management
Investors can enjoy some of the benefits of real estate investment without the hassles of day-to-day management, as syndicators handle property acquisition, development, and management.
Potential Tax Advantages and Distributions
As we mentioned earlier, syndications may offer numerous tax benefits, like depreciation and mortgage interest deductions. Although it's important to remember tax aspects of such investments can be complex and may differ depending on the property or offering and on individual tax circumstances. Neither CrowdStreet or its affiliates offer tax or legal advice. Investors are strongly encouraged to seek advice from qualified tax professionals and/or legal experts regarding the tax consequences based on their particular circumstances.
Additionally, investors may receive regular distributions from property income, however distributions are not guaranteed.
Limited Control Over Investment Decisions
Investors in syndications typically have limited say in the operational and strategic decisions related to the property, which are primarily made by the syndicator or general partner.
Illiquidity and Longer Investment Horizons
Real estate investment syndicates, and the assets they hold, are illiquid, with capital committed for several years. Investors should be prepared for longer investment horizons and limited options for early exit.
Need for Due Diligence and Thorough Evaluation of Syndicators
The success of a syndication partially depends on the competence and integrity of the syndicator, or sponsor. Investors must conduct thorough due diligence to assess the track record, experience, and transparency of the syndicator.
Potential for Conflicts of Interest and Management Fees
There may be instances where the interests of the syndicator and the investors diverge, leading to potential conflicts. Additionally, management fees and profit-sharing arrangements should be carefully scrutinized to ensure alignment with investor interests.
Real Estate Syndication Pros and Cons: The Bottom Line
Every investment carries its own set of dynamics and ensuring that the asset aligns with your personal risk-reward profile and your desired investment timeline is crucial.
Put another way: your ideal investment might not be someone else’s, and vice versa. It’s imperative to perform rigorous due diligence, and to fully understand the foundational concepts behind said investment, whether that’s poring over Intel’s latest quarterly report or taking a trip to a potential new syndicated multifamily development.
If you’re still interested in learning more about real estate syndication opportunities, check out CrowdStreet’s comprehensive guide to real estate syndication investing.
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