For those looking to dive into commercial real estate (CRE) investing, the direct route is always an option. Along with the profit potential, direct investing also entails considerable challenges.
Direct investing means you or a company you own will be the owner of the CRE property. Direct ownership means being responsible for every aspect of acquiring, operating, and disposing of the CRE property.
This means overseeing:
- Prospecting potential assets.
- Performing due diligence.
- Arranging the financing.
- Overseeing acquisition and closing.
- Handling renovations.
- Managing personnel.
- Property management.
- Collecting rents.
- Managing third-party providers, including lawyers, and accountants.
- Federal, state, and local law compliance.
The human capital involved with a direct investment is on top of the capital commitment – not to mention the time and money needed for the education side of all this to familiarize yourself with a specific asset class or market.
As the sole party responsible for sourcing the financing needed to acquire a property, you will be more limited to the size and quality of the property you can acquire than more well-funded institutional investors.
The passive investing route is an option for those who don’t have the time or capital required to invest directly. In the world of CRE, real estate syndication is a popular vehicle for investing in real estate without the stress, risk, or headaches found in direct investments.
The real estate syndication – another word for a private real estate fund – allows investors to pool capital to invest in real assets in a fund sponsored and managed by CRE experts.
Here are the reasons why real estate syndications make sense:
No Learning Curve
Investing in a real estate fund managed experts with knowledge in a specific segment, and the geographic market eliminates the need to expend all those years of knowledge gathering and trial and error required to arrive at the same level of expertise on your own.
By investing in a syndication, you can leverage the expertise and knowledge of an experienced team with boots on the ground who have the established connections to source off-market deals – giving your investment the best chance for success.
Experienced syndications can leverage their hard-earned connections to create efficiencies not possible to do on your own. An infrastructure of established relationships with contractors, brokers, lenders, property managers, and service providers can achieve cost-savings and efficiencies not possible with solo investors. The connections allow for syndications to find off-market deals, get the best pricing on bids, low-cost supplies, and best marketing rates.
With direct investing, you’re limited to the quantity of assets, asset class, and geographic market in your portfolio, especially when starting out where your portfolio will consist of one asset in one asset segment in one location. Instead of investing your capital in a single property, spreading that capital across multiple syndications allows for diversification across multiple properties, asset classes, price ranges, tenant profiles, and geographic markets.
Another layer of risk minimization offered through syndications, in addition to diversification, involves the legal structure of syndications. Because investors are limited partners (i.e., members, shareholders), their risk of loss is limited to the amount of their investment. But because real estate syndications are investments in tangible assets by nature, it is nearly impossible for investors to lose their entire investments.
Hedge Against Inflation
Cash-flowing appreciating assets like commercial real estate have long been a favorite tool of savvy investors for hedging against inflations. That’s due to the inherent nature of inflation. Rising prices not only put upward pressure on rents but increase the underlying value of the real asset. This accelerates appreciation as well as income – the perfect hedge against inflation.
Using CRE as an inflation hedge is particularly valuable when invested in asset classes that thrive even in downturns – where because of demand inelasticity – such as with the case with certain subsegments of multifamily and affordable housing – price increases don’t increase vacancies.
Bigger and Higher-Quality Properties
Investing in syndications with pooled resources allows you to invest in bigger and higher-quality properties – properties not available on your own. Even with financing, the 30% personal capital outlay (25% down payment and 5% expenses) limits direct investors to the types, size, and quality of properties they can acquire.
CRE’s low correlation to Wall Street and the broader markets has resulted in historic above-market risk-adjusted returns. The illiquidity of syndications offers investors consistent, reliable income and long-term wealth shielded from Wall Street volatility.
For those who like to get their hands dirty and have the time and capital to invest on their own, the direct route may suit them.
For others wanting to invest in CRE but are seeking a hands-off investment experience in the hands of skillful management, then syndications make the most sense for these investors.