What is the Difference between a Real Estate Syndication and a Fund of Funds?

February 23, 2024 admin No Comments

What is the Difference between a Real Estate Syndication and a Fund of Funds?

As the economic environment changes and adapts, so does the real estate industry and the operators within it. We have seen the fund of funds method of capital raising become more popular recently, but what exactly is it?

A fund of funds differs from the widely used syndication structure that you may be more familiar with, although each structure bears its own set of strengths and weaknesses. Here are 9 primary differences between a Syndication and a Fund of Funds.

Real estate syndication involves pooling together funds from multiple investors to purchase real estate assets. These assets can range from apartment complexes to commercial buildings, shopping malls, or even large-scale development projects.

  • In a real estate syndication, a sponsor or lead investor typically identifies the investment opportunity, manages the property, and oversees the entire investment process. 
  • Investors in a real estate syndication also have more direct involvement in the specific properties being invested in. They often have a more transparent view of the assets and the potential returns. 
  • Returns in real estate syndications usually come from rental income, property appreciation, or both. Investors may also receive tax benefits such as depreciation deductions. 

A fund of funds, on the other hand, is a pooled investment fund that invests in other investment funds rather than directly investing in assets like real estate or stocks.

  • In this structure, investors contribute capital to the fund, and the fund managers allocate this capital across a diversified portfolio of other investment funds. 
  • Investments can include various types of funds such as hedge, private equity, venture capital, or real estate funds. 
  • They can also provide investors with diversification across multiple investment strategies and fund managers and spread investment risk across different asset classes and investment styles. 
  • Investors in a fund of funds typically have less direct visibility into the underlying investments than real estate syndication investors. They rely on the fund managers to make investment decisions on their behalf

These are just a few of the most prominent differences between real estate syndication and the fund of funds structures and how they are being used in the real estate investment industry today. As an Investor, you will learn more about the nuances of both these structures as they evolve with the market and as you review more deals you will see how they are used on a deal-to-deal basis. With the current market environment, we believe that you will start to see more and more of these fund of funds structures emerge as it alleviates the stress of capital raising for firms and allows them to have capital ready to deploy. As we see it, the fund of funds structure is a welcome addition to any real estate investor’s toolbox.