CRE | Direct Investments vs. Investing Portals vs. Syndications

TruePoint Capital

If you’re interested in allocating commercial real estate (CRE) to your portfolio, you have options. You have public options such as REITs and real estate stocks.

I want to concentrate on private options because I believe private market options offer the best returns without market volatility. In the private sector, I specifically want to focus on direct investing vs. investing through a real estate investing portal or syndication.

Here is a summary of these three options:

Direct Investing.

Direct investing is ideal for the micromanager, but it will require significant inputs of time and capital. Direct investing means direct ownership and management of a CRE asset. This means that you or an entity in your control is on title as the property owner. Direct ownership means you keep all the profits. Still, it also means you’re responsible for every facet of the investment life cycle, from prospecting, due diligence, finance, acquisition, renovations, and management to disposition.

As mentioned above, direct investing will require significant time and capital commitments. It will also entail a steep learning curve that will require acquiring knowledge in a specific asset segment.

Direct investors control all the profits, but they’re also responsible for controlling the investment direction. They don’t have to do all the work – with many functions like construction, contracting, and property management that can be outsourced – but ultimately, they are responsible for all oversight.

Real Estate Investment Portals.

There are two types of real estate investment portals offering passive investment opportunities:

  • Aggregate Sites.
  • Company-Specific Portals.

Real estate investment portals offer investors the opportunity to partner with a real estate investment company by pooling capital with other like-minded investors. Although debt offerings may be offered through these portals, most of the passive investments offered on these portals involve equity ownership structured as partnerships.

Aggregate investment portals offer opportunities from multiple companies seeking capital across multiple asset classes and geographic locations. Crowdstreet is one of the most popular of these aggregate types of investment portals.

Company-specific portals offer one or more investment opportunities from a single promoter. Yieldstreet is one of the largest company-specific portals, offering various security types (notes and equity) across various asset segments and geographic locations.

Certain real estate investing portals may or may not offer opportunities under the crowdfunding regulations (technical term Regulation Crowdfunding) and must meet certain requirements to qualify under these regulations, including making the offerings exclusively through an authorized crowdfunding platform.

To be clear, all offerings under Regulation Crowdfunding must be made through a real estate investment portal like Crowdstreet, but not all real estate investment portals must comply with the crowdfunding rules.

So what is unique about real estate crowdfunding?

Like most passive private real estate offerings, real estate crowdfunding allows investors to invest in CRE by pooling funds with other investors. However, there are additional rules potential sponsors must satisfy under Regulation Crowdfunding to take advantage of the relaxed advertising and investor qualification rules.

Although considered private investments, the crowdfunding rules are a little more relaxed regarding advertising and investor requirements. As long as the offering is made through an authorized crowdfunding platform, sponsors can advertise their offerings by directing potential investors to their offering on the associated crowdfunding platform. They can also accept non-accredited investors provided certain requirements are satisfied.

Unlike the vast majority of private real estate offerings, non-accredited investors can participate in crowdfunded deals. Investors traditionally shut out of private investment opportunities can invest in commercial-grade real estate without the high barrier to entry. By pooling capital, individual investors can invest as little as $10,000, $15,000, and $20,000 and up, depending on the fund.

Real Estate Syndications.

Real estate syndications are specific real estate private equity offerings, and syndications may or may not be offered through real estate investment portals, depending on the offering.

The difference between real estate syndications and private equity offerings is the waterfall compensation structures associated with all real estate syndications that typically put investors first.

Through a syndication waterfall structure, investors get the first bite at net profits through a preferred return – a fixed annualized return based on a fixed percentage of an investor’s capital balance. For example, an investor who invests $50,000 and is entitled to a 7% preferred return will be entitled to an annual return of $3,500 before any additional profit distributions – including any distributions to the sponsors/managers/principals (Sponsors).

After payment of the preferred return, profits from operations are split between the Sponsors and investors based on predetermined percentages. Finally, upon the sale of a property, profits are first distributed to investors until they’ve received a return of capital, with the remaining profits split between the Sponsor and investors.

Investing in CRE can be highly rewarding whether you invest directly or through an investment portal or syndication.

One of the deciding factors on the success of your investment will be your preparation and your knowledge of the particular asset segment in which you plan to participate and the particular vehicle in which you plan to invest.

The knowledge and education you acquire will give you the confidence and the foundation for making wise investment choices in the CRE class.