Updated: Mar 2
It's common practice for accredited investors to seek out the best possible investments for their capital.
Many accredited investors choose real estate for a part of their investment portfolios for a number of reasons:
First, real estate has an excellent performance track record over many decades. Second, it's a great inflation hedge, and third, it provides passive income in addition to appreciation. While there's no doubt that real estate is a popular investment choice for accredited investors, there is some debate about what is the best vehicle for those investments, especially with so many newer options in the market.
In this blog, we are going to break down three common real estate investment strategies for accredited investors: crowdfunding, REITs and syndication.
Crowdfunding is a real estate investing strategy in which many different real estate investors combine funds in order to purchase properties and share the profits. One of the most traditional ways that this has done is through real estate investment trusts, more commonly referred to as REITs.
A real estate investment trust invests the money pooled from real estate investors through crowdfunding. Many REITs trade on public stock markets and generate healthy dividends. The dividends are funded through the revenue that is generated through the rental properties.
More recently, there has been a wave of online crowdfunding sites like Fundrise, Crowdstreet and others. Increasingly, many of these crowdfunding sites are offering investments for non-accredited investors and may offer fractional ownership in alternative assets like artwork, luxury cars, and more.
Crowdfunding has a number of advantages and disadvantages that real estate investors should be aware of before they get involved with them.
REITs & Crowdfunding:
One of the biggest benefits to investing in publicly traded REITs is that they're highly liquid. Investors can easily sell their positions and cash out whenever they want to as long as the stock market is open.
For crowdfunding sites, it's a different story. Fundrise, for instance, traditionally asks for a five year commitment. You can request to cash out at any time, but Fundrise reserves the right to restrict redemptions and you may incur a penalty for early withdrawal, so it's important to familiarize yourself with the funds' rules & regulations.
Adding to the potential risk profile of crowdfunding sites, remember that these aren't shares trading on an open market, so if the company has any financial trouble or decides to limit redemptions, you may have no choice but to leave your money on the platform. Generally speaking, investors should do their own due diligence and be prepared to leave their money locked up for years at a time.
Both REITs & Crowdfunding services generally provide strong regular dividends that can be reinvested or provide cashflow throughout the year. Both options are a good way to earn passive income or compound the growth of your investment. Remember, however, that the dividends will be treated as taxable income.
Smaller Capital Requirements
If you're just getting started or don't want to lock up a lot of capital, REITs and some crowdfunding sites offer a lower barrier to entry.
For REITs, getting started is as simple as making a trade on the stock market, and there is no minimum outside of the security's current price.
Again, crowdfunding sites can differ greatly depending on the platform. While some offer low cost options for non-accredited investors, others others require proof of accreditation and a larger up front capital commitment.
Flexibility & Diversification
Both REITs and Crowdfunding offer a lot of options for investors to build a diversified portfolio across real estate classes ranging from apartments, data centers, shopping malls, debt offerings and more. They can also offer geographic diversification if believe certain regions will outperform others.
Payouts can be smaller
Compared to other forms of real estate investments, the payouts that REITs and many other crowdfunded real estate investments offer can often be lower than what you'd expect through direct real estate investing or through qualified investment firms. The return you do receive will depend on a number of factors, including whether it's a debt investment, equity investment and the ultimate success of the project, So, if you are looking for the highest reliable return, then REITs might not be the best option.
Some investments come with high fees for transactions and management. The higher that the fees are for a given REIT, the lower that the payouts will be. So, before investing in a REIT or crowdfunding service, investors should investigate the fee structure to make sure that they are comfortable with the fee structure.
Some investments come with high fees for transactions and management. The higher that the fees are for a given REIT, the lower that the payouts will be. So, before investing in a REIT or crowdfunding service, investors should investigate the fees to make sure that they are comfortable with the fee structure.
Unproven Platforms Add Risk
While many publicly traded REITs have long track records, crowdfunding sites are still relatively new and many haven't been through market corrections. As with any new platform, there is some risk inherent in investing with them. For example, in 2018, popular crowdfunding site RealtyShares abruptly shut down after failing to raise enough capital to stay afloat.
Syndication is similar to real estate crowdfunding in that it involves other people making the actual real estate investments and managing the properties on behalf of the investors. However, unlike with REITs and some crowdfunded real estate investments, syndication is usually only open to accredited investors.
With syndication, real estate investing experts carefully select one or just a few properties and invite investors to invest with them. The sponsor and the investors actually form a legal entity and buy the properties together. There is a clear ownership structure and everyone is paid out according to this structure.
Investors who invest in real estate syndication are able to choose which properties or funds they invest in. Being able to work with the sponsor to choose which properties you invest in gives you greater control over your investments. Of course, you will only be able to choose from the options that the syndication has available.
Because investors are classified as part owners of the properties for this type of real estate investment, it will give you greater transparency for your investments. For example, you will be able to see property records and other important documents related to the investment if you so choose. For many accredited investors who invest large sums of money into these investments, this is a significant advantage compared to crowdfunded options.
With syndications, you have the potential to develop strong personal relationships with the sponsor and gain trust over time. You will be able to speak to them directly, which is much different than crowdfunded options. If you find a sponsor you like, then you could potentially build a multi-year or even multi-decade relationship with them that could be enormously profitable and rewarding. The best sponsors can drastically outperform the market, just make sure that you choose carefully and look for sponsors led by certified real estate masters with outstanding track records.
REIT & crowdfunding income is considered ordinary dividend income, leading to a larger tax bill. One of the biggest advantages to real estate syndication is that income and depreciation pass through to the investor's tax return. (As always, consult your tax professional for more details and how that can apply to your specific situation.)
Generally speaking, investments made with real estate syndications are less liquid. In fact, it can take months or even years to fully receive your return on capital. If liquidity a concern then syndication is probably not the best option for you.
Higher Capital Requirements
Whereas with crowdfunded options, you can literally get started for a few dollars, many sponsors of real estate syndications have significantly higher capital requirements to participate. With many real estate syndicates minimum investment can start around $50,000-$100,000 and, for larger firms, can frequently be higher.
Which is Better: Crowdfunding or Syndication?
The good news is that all of these strategies a great way to add real estate exposure to your portfolio, providing both appreciation and passive income. Also, if you're interested in real estate but don't want to make the commitment to directly researching, purchasing and managing properties, these are all great options for more passive, hands off investments.
That being said, crowdfunding options are, generally speaking, better for investors who want to deploy smaller amounts of capital, are looking for some diversity in their stock portfolios or are just getting started in real estate.
Accredited investors have a lot more options. So, if you want to deploy larger amounts of capital, have more choice & transparency in the properties you invest in, are looking for tax advantages and want to develop direct, long term relationships with sponsors, multifamily syndication is most likely the better option for you.
Bottom line - before investing heavily in any of these options, you should first decide what your budget is, develop your goals, and do your research to determine which is the best option for you.
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About the Author
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.