Crowdfunding Debt vs Equity vs Syndications

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Readers ask me once in a while for advice on their particular situation. I don’t have all the answers and I’m the first to admit it, but I’m not afraid to share what I’ve learned from my own personal experiences.

I’ve gotten this same question a few times so I figured it might be easier to address it in a post.

“I’m new to real estate investing and am considering Crowdfunding and Syndications. Which one should I do first?”

In reality, there is some overlap between crowdfunding and syndications. Real estate syndications are essentially a form of crowdfunding, pooling capital and investors to purchase real estate. Professional operators set up and manage the deal, while trying to raise money. Online crowdfunding has changed the game in that access has been made much easier all around – to deals and to investors.

Crowdfunding is the label for the various online platforms, but the type of deals vary. There are deals consisting of both debt & equity types. I’ll go into this further in an additional post but put simply:

  • Debt deals – Developers are looking to raise a set amount of money, and promise to pay it back over a certain period of time at a defined interest rate. For example, they need $500,000 for their project and are looking to borrow it for a year at 10% interest. So they typically pay back the interest in monthly payments and after a year, return the capital.
  • Equity Deals – Developers are looking to raise a set amount of money to purchase real estate and plan to improve the property and sell it off in the future. They not only promise a certain interest return but the investors also get a portion of the profit when the properties are sold.

Most syndication deals are of the equity type.

Crowdfunding Debt deals

Pros

  • Lower minimums (possibly as low as $1000)
  • Shorter hold times (sometimes as low as 6 months)
  • Monthly payouts usually
  • Vetted by the platform

Cons

  • With shorter hold times you may have to find deals more often
  • Normal capital gains tax

Crowdfunding Equity & Syndication Deals

Pros

  • Larger upside because of equity participation
  • Longer deal terms so don’t need to keep hunting for more deals
  • Taxes – investors may have an opportunity to realize current income while using depreciation and expenses to offset paper gains (the deal operators will manage this)

Cons

  • Larger minimums (typically $25,000 but I have seen $10,000 minimums)
  • Longer hold times (3-5 years) and vague depending on when property is sold

So to answer the question posed at the beginning of this post, as usual the answer is “it depends.”

Personally I started by investing in a crowdfunding debt deal because of the lower minimums and I wanted to start by dipping my little toe into the water. However, I quickly moved on from that to syndication deals as well.

See if any of the pros and cons makes you lean one way or another. Choose what makes you more comfortable and go with your gut. The key is taking action and continuing to study and learn as you go.

Everyone is busy, but I do know that as a busy doctor, starting with something that doesn’t require active management is a great idea.

Good luck!

 

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