Real Estate Funds vs. Syndications – Which is the Right Investment For You?

By David Hansel

Real estate investments are a large and growing asset class with a multitude of investment vehicles to choose from. Per a recent report, more than half of investors plan to increase their real estate investments this year. As investors add multifamily real estate to their portfolios, they have an option of investing through a fund or syndication. Each has its benefits and risks, but the right choice is the one that meets the investors’ needs. In this blog, we will explain the differences between these two types of real estate investments, so you walk away with a better understanding.

What is a real estate investment fund?

A real estate investment fund raises capital from investors upfront and uses it to acquire multiple real estate properties that fit the fund’s investment criteria. Private equity real estate funds are typically structured as closed-ended fund vehicles meaning they take capital commitments from sophisticated investors that meet specific qualification thresholds. As property assets are identified, the fund manager will call capital from the investors to fund the deal.

What are the potential benefits of a real estate investment fund?

Diversification of assets

Funds allocate capital across multiple properties, which reduces concentration risk. Even if one property does not perform as well as planned, other properties have the potential to generate outsized returns. 

Leverage manager expertise

A real estate fund presents an opportunity to invest alongside experienced real estate fund managers and leverage their network of established relationships. Fund managers are responsible for defining the overall investment strategy, deal sourcing, underwriting assets, obtaining favorable financing terms, and managing the properties. While being good stewards of investor capital, fund managers seek ways to drive NOI (Net Operating Income) to generate ongoing cash flow and positive long-term returns for investors. Investors can enjoy benefits like ongoing cash flow, tax advantages and long-term risk-adjusted returns without playing a role in actively managing the investment. 

Flexible fund structure

Real estate funds can be structured as either closed-ended or open-ended. Closed-ended funds are subject to fixed time periods during which the funds can buy and sell investments. Thus, the returns of closed-ended funds can be heavily impacted by market conditions during these fixed periods. Open-ended funds, on the other hand, offer more flexibility. Investors can invest and withdraw capital more frequently, and therefore not have their capital locked up for 5 – 7 years (the typical life of a closed-end fund).

What is a real estate syndication?

A real estate syndication involves two parties: the sponsor and the investor. The sponsor raises capital from one or more investors on a deal-by-deal basis. The sponsor sources the deal and handles all back-end operations. Sponsors provide investors with information on the property, financials, and market intelligence. Once the investor chooses to place capital in the deal, there is very little active management of the investment from the investor’s perspective.

What are the potential benefits of a real estate syndication?

Increased buying power

With a syndicate deal, investors can invest in a much larger and more stable investment (of their choosing) than they could on their own. A group of investors can pool their capital to increase their buying power. For example, a $10 million investment is more easily achieved with ten investors than just one investor. 

Access to deal flow

For investors who want to choose the deals that they invest in without doing the sourcing themselves, a syndication may be a good option. Sponsors handle initial due diligence and sourcing off-market deals from their extensive broker networks. Investors can get access to these deals without doing the legwork.

Leverage a sponsor’s experience

Similar to a fund, syndicate investors rely on the sponsor to source the deal, complete due diligence, and manage the investment from start to finish. Thus, it’s extremely important for the sponsor to have years, if not decades, of experience in the industry. Investing with a highly qualified sponsor is another way investors can benefit from a syndicate deal.

How can I invest in a real estate fund or syndicate deal?

With an understanding of real estate investment funds and syndicate deals, investors can be empowered to choose the real estate investment vehicle that may work best for them. If you’re ready to begin investing in multifamily real estate, Lucern Capital Partners can help. 

About Lucern Capital Partners

Lucern Capital Partners is a real estate investment firm that targets value-add multifamily and mixed-use assets along the U.S. East Coast. With over 55-years of combined real estate experience, the Lucern Capital Partners team has successfully transacted on over $2.5 billion of debt and equity real estate transactions during their careers. They bring that knowledge to accredited investors to provide income-generating investments in institutional-quality multifamily and mixed-use assets through the Lucern Multifamily Value Fund I, L.P., and standalone transactions.

Contact us to learn more about multifamily real estate investing with Lucern Capital Partners.