Real estate syndication has become an increasingly popular way for investors to gain exposure to real estate in a passive manner. In a real estate syndication, a group of investors pools their funds together to invest in a large-scale property. The key benefits of real estate syndication are diversification, professional management, and access to opportunities that would otherwise be unavailable to most individual investors.
However, real estate syndication also comes with downsides like lack of control, fees, and risks associated with the real estate asset class. For passive investors looking to add real estate to their portfolios, understanding the pros and cons of real estate syndication can help determine if it is the right choice.
Benefits Of Real Estate Syndication: Diversification And Professional Management
The main benefits of real estate syndication are diversification and access to professional real estate management. By pooling funds with other investors, syndication allows individuals to invest in large-scale properties that would otherwise be inaccessible. This provides more diversity compared to owning a single investment property.
Syndications are also professionally managed by real estate companies and firms that source, acquire, and oversee the management of properties. Individual investors get exposure to experienced real estate management and benefit from the knowledge and expertise of the sponsoring firm. Professional management also makes real estate syndication a passive investment, freeing up investors’ time and effort.
Drawbacks Of Real Estate Syndication: Lack Of Control And Fees
The biggest downside of real estate syndication is the lack of control and influence over the investment. Although investors in syndication own a share of the property, they typically have limited control or say in decisions about the acquisition, management, or disposition of the assets. The sponsoring firm makes all the decisions. Some investors may not feel comfortable with so little control and oversight of their investment.
There are also various fees associated with real estate syndications that can reduce overall returns. Acquisition and financing fees are charged for finding and purchasing the properties. Ongoing management and operational fees are charged for overseeing and running the properties. And additional fees may be charged during the exiting of the investments. The multiple layers of fees, while often reasonable, still cut into investor profits.
Risks Of The Underlying Real Estate Asset Class
Perhaps the most significant risks with real estate syndication stem from investing in the real estate asset class itself. Real estate values can fluctuate, and properties may fail to generate expected rental income. There is a possibility of loss from casualty or property damage as well. Although diversification within syndication helps mitigate risk, the risks associated with the real estate sector as a whole still apply.
For some passive investors, the pros and cons of real estate syndication as highlighted here may outweigh the potential benefits. However, for many others, real estate syndication offers an attractive way to gain exposure to real estate in a diversified and hands-off manner. The key is going in with realistic expectations about fees, control, and real estate risk.