Investors are looking for something different from the quotidian Wall Street offerings of stocks, bonds, and mutual funds. Many are turning to real estate. There are many ways to invest in real estate: fixing and flipping, ETFs (exchange-traded funds), REITs (real estate investment trusts), and real estate syndication. Fixing and flipping involves hard work; it’s active investing. But ETFs, REITs, and real estate syndication are ways to invest passively. They require no swinging of hammers or unblocking of toilets.
This article examines two types of passive real estate investing: crowdfunding and real estate syndication. We explain these investments, why more investors are turning to them, how they work, and how ATTOM serves the passive real estate investor.
The Appeal of Passive Real Estate Investing
Fixing and flipping is one way to leverage real estate, but these ventures require significant work. Even if you find a contractor to do the heavy lifting for you, as the investor, you still have to manage the projects. With passive real estate investing, once you do your due diligence, you only have to provide the financing.
Other than ETFs and REITS, passive real estate investing comes in two forms: traditional crowdfunding and real estate syndication. Here are some of the reasons investors turn to crowdfunding and real estate syndication.
- You Can Invest in Larger Projects
Through crowdfunding or real estate syndication, you can engage in larger projects by combining funds with other investors. Both options may be cost-prohibitive for investors with limited funds, but if you have sufficient capital to invest, they are popular investing models for larger projects like refurbishing multifamily buildings, condos, apartments, and townhouses.
- Tax Benefits
One big reason investors are attracted to passive real estate investing is the hands-off approach; another is the tax benefits.
Real estate syndications have several tax benefits, including depreciation and a lower tax rate on capital gains. Investors in real estate crowdfunding are taxed at the ordinary tax income rate unless they have invested in a project for at least one year. At that point, they may pay capital gains tax rates.
- A Growing Market
Real estate is a hot commodity for investors who are weary of stocks and bonds. It’s difficult to get statistics on investments in real estate syndication, but according to Zion Market Research, the global real estate crowdfunding market was worth $1.3 billion in 2019. That market is expected to grow at a compound annual growth rate of 58.1% into 2027.
What Is Real Estate Syndication?
Real estate syndication is an investment where a group of investors pool their funds and invest with a managing partner or syndicator who purchases and manages a real estate property. The syndicator acquires the property, operates the value-add development of the property, and manages the leasing, maintenance, and the final sale of the property. These are passive investments because you, as an investor, only contribute capital.
Real Estate Crowdfunding Vs. Real Estate Syndication
One difference between real estate crowdfunding and syndication is that syndication is more regulated. For example, investors often have to be accredited before they can participate. Crowdfunding, on the other hand, while accessible, is not as transparent. Investors often do not have access to the managing team in a real estate project and may have no idea of their level of experience and expertise.
Pros and Cons of Real Estate Syndication Vs. Crowdfunding
Investing in real estate syndication is a wise choice for some, but it’s not for everyone. Similarly, crowdfunding is not for the fainthearted. Here are some of the pros and cons of real estate syndication, and how they compare to the pros and cons of crowdfunding
Pros of Real Estate Syndication
- Diversification: Investing in real estate syndication diversifies a portfolio.
- Expert Real Estate Management: Expert syndicators increase the likelihood of successful investments.
- Passive Income: Investors enjoy passive income from rental returns and property appreciation without active involvement.
- Shared Costs and Risks: Syndication spreads costs and risks across multiple investors and the syndicators, aligning interests.
- Access to Larger Properties: Syndication investors can access larger and potentially more profitable real estate opportunities.
Cons of Real Estate Syndication
- Due Diligence: Your investment success depends on the syndicator: you have to know how to do your due diligence and pick the right partner.
- Limited Control: Passive investors rely on the operators for property management decisions.
- Lack of Liquidity: Real estate syndication investments are less liquid than stocks or bonds with limited access to their capital.
- Market Risks: Syndication is susceptible to market fluctuations and economic downturns, increasing the need to partner with experienced operators.
- Complexity: The financing and payout structures are complicated. Investors should grasp the financing terms and projected returns.
How Crowdfunding Differs from Real Estate Syndication
Crowdfunding differs from real estate syndication in that there is no syndicator to partner with investors. The investors are on their own.
With crowdfunding, a sponsor or lead investor may replace a syndicator and act as a point of contact. The crowdfunding method typically takes place online on dedicated crowdfunding platforms like Fundrise, RealtyMogul, and CrowdStreet. These investments tend to require less capital, and you don’t need to be an accredited investor.
A real estate sponsor or developer will list a project online, specifying the funding needs and investment terms. For crowdfunding and syndications, projects are often residential and commercial properties value-add development where a building is refurbished so that it claims higher rentals. Individual investors can review the offerings and contribute funds if they align with their investing goals.
Crowdfunding gives you most of the advantages that syndication does, except that you cannot interrogate the team that will lead the project you are investing in. Because the expertise and track record of the managing team are what will make or break a real estate deal, this makes participating in real estate crowdfunding an extremely risky endeavor.
ATTOM’s Role in Real Estate Crowdfunding and Syndication
The project operator’s track record could be the best indicator of how successful a real estate deal or project will be. So, the investor is responsible for conducting their own due diligence on both the project fundamentals and the parties managing the project operations.
Technology is facilitating this process. Regarding real estate crowdfunding, blockchain technology can enhance transparency and security in transactions. Where all real estate investing is concerned, data platforms like ATTOM offer data and analytical tools for investors to do their own risk assessments.
ATTOM provides comprehensive real estate data that can be instrumental for investors in assessing real estate syndicators and their deals. Here are several ways ATTOM data can be utilized:
Property Valuation: ATTOM’s property data includes property valuations, historical sales prices, and estimated market values. Using this data and AVM (automated valuation models), investors can verify the accuracy of syndicators’ claims regarding acquisitions and future sales.
Property Data: Using ATTOM’s extensive property data, investors can check on past operator projects to see sales, renovations, foreclosures, and assess operators’ actual results.
Potential Rental Income: ATTOM has developed a Rental AVM that estimates future rental income for properties.
Market Trends: Investors can research local market trends, including economic trends and demographic changes, to assess a deal’s potential returns.
Neighborhood Analysis: ATTOM’s Neighborhood Navigator is a solution that provides data on neighborhood demographics, crime rates, school ratings, and amenities. This information helps investors evaluate the syndicator’s analysis of a neighborhood’s appeal and a property’s potential for appreciation.
Risk Assessment: By analyzing historical data on key factors like delinquencies, liens, environmental hazards, and climate change provided by ATTOM, investors can take a broad approach to property development risk assessment and any potential for unexpected costs or liabilities.
ATTOM Answers the Questions Investors Have Regarding Passive Real Estate Syndication
Successful real estate investors will agree that the success of a property development project or real estate deal depends on the caliber of the operators or the team in charge. Before choosing a passive real estate investment through a syndicator or crowdfunding platform, investors must do their due diligence.
ATTOM provides extensive, recent, and accurate data so that investors can conduct their own risk assessments and adopt a data-driven approach to their passive real estate investments.
For more information on how ATTOM’s data solutions can support your investment decisions, contact a representative today.
