Let me start by saying that Real Estate Crowdfunding is essentially a form of syndication. All that happens here is the sourcing and servicing of investors happens on an online platform. A simple analogy would be Syndication is your regular cab service and Real Estate Crowdfunding is Uber.
But just like Uber, which offers a bunch of features and user experience as well as opening of access that a regular old cab service cannot meet, Real Estate Crowdfunding leaves syndication in the dust.
For those who are not aware, syndication is a way for a bunch of people to come together and pool their resources, which include time and expertise into a property project. This can include buying a built up property or doing a development project.
The advantages are numerous. The opportunities that were previously out of reach for the individual members are now within the grasp of the collective. Funds can be pooled together to buy a more expensive project or property, which may offer better returns. Some participants in the Syndicate can bring in expertise such as Project Management, Building, planning etc., which they can barter instead of money.
But there are several pitfalls as well. Most of the times, Syndicates consist of people whom you know and trust and have a good rapport with. These typically include friends and family. You feel comfortable putting your money into something with these people given that you can vouch for them. But as anyone who has done business with family and friends can attest to, that’s where the problems begin.
Because this is a friends and family affair, professionalism is often missing. Agreements are loosely written with the hope that trust and common sense will see the members through any difficulty. Often times, members claim experience, which they don’t really have. So instead of getting the best possible builder or project manager, they tend to hire their friend Tony who has done half a townhouse previously. Different members have differing financial outlooks and when the project starts running into trouble (as it often does), cracks start to appear. Some people want to cut short and withdraw their money to send their kids to college and others want to hold out. Tempers start to simmer.
This leads to tricky situations, as you can’t call out your friends and family. Even with the best of the legal frameworks in place, business dealings often lead to failed projects as well as ruined relationships due to the emotional involvement with friends and family. The best financial dealings are done in an unemotional way, and any astute investor can attest to that.
Also, most syndicates do not exceed 5 to 6 people. Legally you cannot typically exceed 20. But anything beyond 5 or 6 starts getting unmanageable. A 2 million dollar small project with 5 member syndicate still requires a commitment of 500K, which is not a small amount.
Real Estate Crowdfunding is a form of Syndication, but instead of being lumped with friends and family you combine forces across many people whom you could have never known yourselves. The internet gives scale and reach. Larger number of investors also means smaller amounts. Projects listed on a Crowdfunding Real Estate platform must be professionally managed by the best players in the industry and come with a full retail Public Disclosure Statement or an Information Memorandum from people who have done this many times before.
The show is run by professionals and you are playing the role of an arm-chair developer by participating with only small amounts. Plus, you get to participate in deals, which you could never get access to even via a Syndicate.
There is another type of Syndication called Managed Syndicate. A Managed Syndicate addresses some of the biggest issues, which an ad-hoc Syndicate suffers from. First, a professional manager and property team picks the right opportunity and offerings are typically made under the back of strong legal structures. These opportunities are typically but not limited to Commercial real estate. Examples include Petrol station dealerships, shopping malls, warehouses etc. The money is pooled from many investors and then the professional team puts the funds to use on the specific project for which the funds were raised.
Quite a few Managed Syndicates have delivered strong returns due to their focused and professional management teams. However, the big issue with Managed Syndicates is that their typical minimum investment is a significant amount (say $100K and above, preferably much above). This pretty much locks out all the smaller investors. So a managed syndicate is a great way to invest, if you can access it.
That’s where a Real Estate Crowdfunding platform comes in. It has all the benefits of a Managed Syndicate, which includes professional management, and choice of investment but the minimum starts from as low as $2000. Think of the era when cars were expensive and were only the playthings of the rich. Then Henry Ford and his Model T came along and suddenly cars became affordable and within the reach of the common man.
That’s what Real Estate Crowdfunding platforms are doing. They are making the best real estate development opportunities, which were solely reserved for the big shots available to the common man. They are making the world a little bit more… equal.
Save your relationships as well as the hassle of Syndication. Real Estate Crowdfunding is the way to go!