Customizable Real Estate Fund vs. Syndication

Real estate is an excellent option for investors looking to diversify their portfolios and boost their returns. Two great ways to start investing in multifamily real estate are through real estate funds and syndications. 

Although a customizable real estate fund and a syndication may seem identical at first glance, there are key differences between the two that should be considered when choosing the right investment plan for yourself. Continue reading to learn about each investment strategy.

How to Choose the Right Real Estate Investment Vehicle

Choosing the right real estate investment vehicle is an important decision that will impact your financial success. These are factors that will determine which investment strategy is best for you:

  • Risk tolerance. How much risk are you comfortable with?
  • Investment goals. What type of returns are you expecting from your investments?
  • Time horizon. How long do you plan to stay invested?
  • Investment experience. How much experience do you have investing in real estate?
  • Investment capital. How much money do you have available to invest?

What is a Customizable Real Estate Fund?

A customizable fund is an investment fund that allows investors to customize their investments to meet their specific needs and goals. Customizable funds are typically managed by a professional fund manager and enable investors to choose from various asset classes, including stocks, bonds, real estate, commodities, and currencies.

A customizable real estate fund is one of many different types of funds, and its sole purpose is to invest in real estate to produce income. The beauty of such a fund is that it allows investors to tailor their investments to meet their individual goals and risk tolerances. 

For example, an investor who is looking for income may choose to invest in multi-family homes, whereas an investor who is looking for capital appreciation may choose to invest in single-family homes.

Pros and Cons of Investing in a Customizable Fund

Investing in a customizable fund allows investors to diversify their portfolios and customize their investments to meet their individual goals and risk tolerances. Additionally, customizable funds are generally easier to manage than other types of investments because a professional fund manager handles them.

One major advantage of customizable funds is that you only have to do one Private Placement Memorandum (PPM) with the fund. Each separate deal within the fund will have its own terms to provide additional transparency to investors.  This is why it’s called “customizable” – you get to pick which deals you want your funds allocated to and each deal will have its own deal terms sheet. 

Another advantage is that a customizable fund can invest in a syndication and negotiate a different agreement with the syndicator to leverage better returns for its investors.  It will have separate expenses to account for, but the negotiated better terms will more than make up for the expenses and fees to run it.  This can include a higher preferred return, better deal deal-level splits, and in many cases, both.

Customizable funds can be more expensive than other types of investments, as investors must pay fees to the fund manager.  Additionally, customizable funds can be more volatile than other types of investments, as the fund manager is tasked with making investment decisions on behalf of the investors.

A step-by-step guide to investing in a customizable fund

Investing in a customizable fund can be a fantastic way to diversify your portfolio and increase your returns. To get started, follow these steps:

  • Choose a fund manager. Select a fund manager who has a proven track record of success and a good reputation in the industry.
  • Set your investment goals. Decide what type of investments you want to make and what kind of returns you are expecting.
  • Research the fund. Read the fund’s prospectus and other materials to ensure you have a firm grasp of what you are investing in and how the fund works.
  • Invest in the fund. Place your order and start investing in the fund.
  • Monitor your investments. Keep an eye on your assets and ensure they meet your expectations.

What is a Syndication?

A syndication is an investment group that pools funds from multiple investors to purchase real estate. Syndications are typically managed by a professional syndicator and allow investors to invest in various asset classes, from residential to commercial real estate.

Syndications offer investors the opportunity to diversify their investments across several asset classes and reduce risk. However, syndications also come with their own set of risks that investors should be aware of. For example, due to the illiquid nature of real estate, investors may have difficulty exiting their investments promptly.

Benefits and Drawbacks of Investing in a Private Fund

Investing in a syndication allows investors to diversify their investments across several asset classes and minimize their risk. Additionally, syndications are more cost-effective than other types of investments, as investors only have to pay the syndicator’s fees.

However, syndications can be more challenging to manage than other types of investments, as the syndicator handles investment decisions on behalf of the investors. Additionally, syndications can be more illiquid than other types of investments, as it can take time to find buyers for the real estate investments.

A step-by-step guide to Investing in a Real Estate Syndication

Investing in a real estate syndication can significantly diversify your portfolio and increase your returns. To get started, follow these steps:

  • Choose a reliable syndicator. Make sure to select a syndicator with a proven track record of success and a good reputation in the industry.
  • Research the syndication. Read the syndication’s prospectus and other materials to be sure of what you are investing in and how the syndication works.
  • Invest in the syndication. Place your order and start investing in the syndication.
  • Monitor your investments. Keep an eye on your investments and ensure they meet your expectations.

Why Investing in a Private Equity Fund is Popular

Both customizable funds and syndications can use private equity.  The growing popularity of private equity funds is due to the way they are utilized to acquire commercial or retail real estate or residential properties that would generate revenue.

Investors seeking a diversified portfolio can benefit greatly from private equity funds, which are a great option for the real estate industry. The benefits include.

  • Private equity funds have a promising return potential. They are able to make substantial purchases that would be out of reach for individual investors if they had to pay for them out of their own pockets. On top of that, such funds are overseen by investment managers with years of experience in the industry. 
  • Putting your money into a private equity fund also allows you to spread your risk. Investors can reduce their overall exposure to risk by diversifying their holdings in a fund across a wide range of assets and locations. By spreading their portfolios across multiple properties and locations, investors reduce their vulnerability to the failure of any one of them. 
  • The last potential benefit of private equity funds is that they can provide tax savings. Investment income from real estate may be eligible for preferential tax treatment compared to other forms of earnings like interest and dividends from stocks and bonds. Potential investors may also benefit from depreciation deductions, which can lower their taxable income. 

Conclusion

Real estate investments can provide a fantastic path to diversifying your portfolio and increasing your returns. There are a couple of ways to invest in real estate, including investing in a customizable fund and investing in a real estate syndication. 

All of these investment vehicles have their pros and cons, so choosing the one that best fits your investment goals and risk tolerance is essential. By researching and understanding each investment vehicle, you can make an informed decision about which investment strategy will maximize your returns and meet your financial goals.

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