What Is The Difference Between Funds and Syndications in Multifamily Investing?

Dear valued existing investors and future investors,

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As with many forms of real estate investing, such as multifamily private equity syndications, there are a wide variety of industry related terms in use. Obviously, many real estate investors understand the majority of such terms, but it’s easy to occasionally mix them up or not be so clear about the finer, more subtle differences between them.

The differences between (real estate) “funds” and “syndications” is just one example, so this week we thought we’d take a look at what the differences in these two terms really are.

What are funds and syndications in multifamily investing?

Multifamily investing is a popular real estate investment strategy which involves purchasing and managing multifamily properties such as apartment buildings.

When it comes to financing these investments, there are two common options available: namely, funds and syndications. Whilst both options can provide investors wanting to build wealth with access to multifamily investment opportunities, there are some key differences between the two that are important to understand so, firstly, let’s have a look at:

• Funds and some key benefits of investing therein
  

A fund is a type of investment vehicle that pools money from multiple investors and invests it in a portfolio of assets. In the context of multifamily investing, a fund would pool money from investors and use it to purchase and manage a portfolio of multifamily properties. Investors in the fund would own a share of the portfolio, rather than owning individual properties outright.

One of the key benefits of investing in a fund is that it provides investors with access to a diversified portfolio of assets. By investing in a fund, investors can spread their risk across multiple properties, which can help to mitigate the impact of any individual property performing poorly. Additionally, investing in a fund can be a passive investment strategy, as the fund manager will be responsible for managing the properties and handling all of the day-to-day operations.

Another benefit of investing in a fund is that it can provide investors with access to larger multifamily investments that may not be feasible to undertake as an individual investor. For example, a fund may be able to purchase a large apartment complex that would be too expensive for any individual investor to purchase on their own.

However, there could be some drawbacks to investing in funds; as an example, some fund managers are fee heavy and this could erode investor returns over time. In any event, investors should carefully read the offering documents of a fund to satisfy themselves about such issues.

• Syndications and some key benefits of investing therein

A syndication is a type of investment structure that also involves pooling money from multiple investors to purchase a single or multiple properties. In a multifamily syndication, a group of investors comes together to purchase a single or multiple multifamily properties, with each investor owning a percentage of the property.

When investing in a syndication the investor knows exactly what asset is being acquired, be it one asset or multiple assets. On the other hand, in a fund the investors know what the fund’s mandate is but, in most cases, they don’t know exactly what assets are being acquired. In fact, the fund manager doesn’t usually know as the fund first raises equity and then go and acquire the properties.

Syndications are relatively quick in starting produce investment returns and syndication investors don’t have a long period to make a decision and transfer their funds. In some cases there are only 30 to 60 days for investors to act.

However, in a fund with a 10 year timeframe, this is more extended. In such a fund structure the first 1 or 2 years are dedicated to raising capital and the next 4-5 years dedicated to executing the business plan; in the last 2 years, the fund winds up and divest all assets.

Syndications also, typically, have lower fees compared to funds, which can help to increase returns over time.

To invest in a real estate multifamily fund or in a syndication?

Deciding whether to invest in a fund or syndication ultimately depends on the individual’s investment goals and preferences. For those investors looking for a passive investment but looking for higher returns and wanting to know exactly which property/ies they are investing into, then a syndication might be a better option.

It’s also important for investors to carefully evaluate the investment sponsor before investing in either option. The sponsor is responsible for managing the investment and making decisions on behalf of the investors, so it’s important to make sure that the sponsor has a track record of success and is aligned with the required investment goals.

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CPI Capital believes that both funds and syndications can be viable options for investors looking to gain exposure to the multifamily and/or BTR-SFR real estate sectors.

As mentioned, real estate syndications allow passive investors to be able to choose to participate in deals that align with their specific investment goals and risk tolerance, rather than investing in a pool of assets which have not yet been determined. 

On the other hand, investing in funds can also be rewarding, especially if the fund manager has a demonstrable track record of success.

For readers interested in investing in funds, CPI Capital is shortly launching a Canadian multifamily fund focused on acquiring US multifamily assets and you can click here to learn more about our fund. 

Yours sincerely,

August Biniaz
CIO, Co-Founder CPI Capital