Real estate syndication and direct ownership are two popular options for investors looking to make money in real estate. But there are many differences between these two investment models.
In this article, we’re breaking down real estate syndication vs. direct ownership. We’ll explain how each model works, outline the similarities and differences, and help you decide which is the better option for you as you build a real estate portfolio.
Here’s what you need to know about real estate syndication vs. direct ownership.
What Is a Real Estate Syndication?
Real estate syndication pools capital from multiple investors to fund a specific real estate investment. The investment project is professionally managed by a real estate sponsor, who handles the property acquisition, supervises the construction/renovation, and directs the sale or ongoing management of the property.
Many investors confuse syndication with real estate crowdfunding, which is understandable because the models are so similar. However, there are a few small differences between syndication and crowdfunding. Notably, syndication offers a more stable legal ownership structure than crowdfunding.
If you’re looking for passive returns, optimized by professional management, syndication is an excellent investment option for you. To learn more about the details of syndication, check out our article, Real Estate Syndication Explained.
What Does Direct Ownership Mean?
Direct ownership is when an investor purchases a property on their own and is solely responsible for the management of the investment.
Traditional buy-and-hold rentals and fix-and-flips are both examples of direct ownership. With direct ownership, the investor handles every detail of the deal (or hires individual professionals to manage specific aspects).
For a rundown of what direct ownership entails, check out our Real Estate Investor’s Checklist, which provides actionable steps for planning, acquiring, managing, and selling property.
Similarities Between Real Estate Syndication and Direct Ownership
There are several similarities between syndication and direct ownership. Most of the benefits of investing in real estate apply to both models since both capitalize on the real estate market. But we want to call attention to several specific similarities:
Syndication and direct ownership both allow you to own a stake in the underlying real estate. With direct ownership, you own 100% (minus any debt financing), and with syndication, you own a percentage based on the amount you invest along with other investors. This equity ownership entitles you to a share in the profits when the property sells.
Equity also gives you financial leverage. For example, individual owners may use a home equity loan, HELOC, or cash-out refinance to convert some of their equity into cash. Similarly, a syndication sponsor may pull cash out of a long-term syndication deal to return the original investment capital to investors before the project sells. This is common practice in the BRRRR method of real estate investing.
Return Potential
Both syndication and direct ownership have the potential for strong returns. Some investors believe that direct ownership offers higher returns because the owner does not need to pay any fees or carried interest to a real estate sponsor. However, syndication projects often provide higher returns because the experience and connections of the project’s sponsor produce better results on more complex deals than an individual investor could achieve. For example, from 2017 through 2023, Gatsby Investment provided an average annualized return of 23% to syndication investors.
Tax Advantages
There are many tax benefits of real estate investing, including depreciation, operating cost deductions, and capital gains tax rates. These benefits apply to both direct owners and syndication investors, as both hold equity in the property.
Differences Between Real Estate Syndication and Direct Ownership
As you consider which of these investing models is right for you, pay attention to these key differences between syndication and direct ownership.
Upfront Costs
Syndication spreads the financial requirements across multiple investors, bringing the minimum investment amount down to more affordable levels. Direct ownership requires an individual investor to come up with the down payment and closing costs, plus money for any renovations and holding costs while the property is vacant.
Syndication shares can often be purchased for as little as $10k-$25k. For comparison, a 20% down payment on a $400,000 investment property with closing costs of 6% would cost you $104,000.
Ongoing Expenses
Syndication does not require any ongoing capital infusions from investors. Once your initial investment is wired to the sponsor, you don’t ever have to pay more into the investment.
Direct ownership, on the other hand, comes with constant ongoing expenses. As an individual owner, you’ll have to make regular payments toward the mortgage, property taxes, insurance, structural maintenance, repairs, maintenance of the grounds, and unit turns between tenants. Hopefully, the incoming rent will cover all of these expenses, and still leave you with a profit. But there is no such guarantee.
Time and Energy
Every detail of a syndication project is handled by the project’s sponsor. Once you research to select an investment opportunity and send in your investment capital, your job is done. You can watch the progress of your investment while spending your time and energy on other ventures.
Direct ownership requires time and energy. If the project includes construction or renovation, you need to do the work yourself or hire and supervise professionals to do it. If the project is a rental, you’ll need to handle all leasing, rent collection, maintenance requests, and tenant issues yourself or hire a property manager.
Knowledge and Skills
With syndication, you can leverage the knowledge and skills of the project sponsor and their team.
With direct ownership, you need to have the knowledge and skills necessary to make the investment a success. Or you need to have the skills to find and hire talented people whom you can trust.
Diversification Potential
Because syndication offers lower investment minimums than direct ownership, it’s easier to diversify. You can simply spread your investment capital across multiple syndication projects for instant diversification.
Diversification through direct ownership takes longer as it is difficult to amass enough capital to purchase additional properties.
Barriers to Entry
Syndication comes with a unique barrier to entry. To invest in syndication, the Securities and Exchange Commission (SEC) requires you to be an accredited investor. You have to meet the SEC’s income, asset, or professional requirements to qualify as an accredited investor before you can place a syndication investment.
Direct ownership has no such requirement. However, there are different barriers to entry for direct ownership. Not only do you have to have a large amount of cash for the purchase and ongoing maintenance, but you also need to have great credit to qualify for the mortgage on an investment property.
Liquidity
Real estate is not traditionally known as being a liquid investment. Direct ownership is illiquid as the process of selling a property to convert the asset to cash is time-consuming and expensive.
Syndication is more liquid because it comes with shorter investment periods. While you cannot cash out of a syndication project before it is complete, the investment period may be two years or less. This allows you to retrieve your capital sooner than with direct ownership.
Risk
While real estate is a low-risk investment in general, syndication offers less risk than direct ownership for a couple of reasons. First, the financial risk is spread across multiple investors in syndication, so no single investor shoulders the full financial burden. Secondly, the direction of an experienced sponsor reduces risk. These experts understand the market better than most and have systems in place to mitigate risk while maximizing reward potential.
Control
Direct ownership offers much more control than syndication. Syndication offers more control than whole-fund investing (like real estate investment trusts (REITs) for example) by allowing investors to choose the specific project(s) they want to invest in. But syndication investors do not have control over the direction or management of the project.
Direct ownership, on the other hand, allows investors total control, within the boundaries of applicable rules and regulations.
Property Access
Syndication investors may know the address of the property and can drive by the location at any time, but they do not have the right to access or occupy the property.
Direct ownership investors, on the other hand, can access the property within the limits of any lease agreements and landlord-tenant laws. If the owner’s living situation changes and the property becomes vacant, the owner can even move into the property as a primary residence.
Real Estate Syndication vs. Direct Ownership: Which is Right for You?
If you are a non-accredited investor, looking for a hands-on approach to real estate investing, direct ownership could be a great fit for you.
If you’re an accredited investor, interested in maximizing your return potential on a passive real estate investment, syndication could be a better option for you.
Explore Real Estate Syndication Investing with Gatsby Investment
Gatsby Investment is a California-based real estate syndication company that specializes in the lucrative Los Angeles market. With Gatsby, you can capitalize on the LA housing market even if you live out of state or out of the country.
We focus on low-risk, high-yield, value-add projects. Our goal is to make unique real estate deals available to all accredited investors.
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