Many property investors today, both new and experienced, choose to invest through either a joint venture or a syndicate. They make this choice primarily because acquiring and maintaining a successful quality real estate portfolio requires time and considerable amounts of money. A sizable and reliable intake of funds is also necessary to ensure that your investment plan runs smoothly.
You may be in the initial stages of getting involved in real estate investing (REI). If so, you may be wondering what is the best way to raise enough funds to acquire a major property asset. Through your research and due diligence, you will most likely discover the answer to this question. Most successful property investors make their investments through a joint venture or a real estate syndicate.
Major Differences Between Joint Ventures and Syndicates
As you first start learning about joint ventures and real estate syndicates, you may see very little difference between them. Yet as you explore these two methods of property investing, you will soon discover some important differences in the two. As you gain thorough knowledge about their operations, you will understand which method is better for your specific investing plan and goals.
What Is a Joint Venture?
A joint venture (JV) is an active partnership between two or more investors. The essential element of a joint venture is active participation in a property investment by each investor. As an example, suppose that you and two other investors partner in a real estate investment deal.
If you are an experienced property renovator or rehabber, this can be your active role. Another investor in the partnership may be an expert property manager, and the third may be good at obtaining financing. Every partner in the deal has a definite role to play.
In order for your investing project to gain success, all partners must participate, using their specific skills, knowledge and experience. There is no role for passive investors in a joint venture property investment.
What Is a Syndicate?
Any property investment in which the expected profits on the investment are issued by a third party is a syndicate investment. Real estate investing syndicates include a sponsor (or general partner) and passive investors (or limited partners).
The role of the passive investors is raising funds for making the investment. The sponsor then manages all other aspects of the investment. At the time an investment property is sold, the sponsor also handles all of the details of the sale.
A real estate investing syndicate is viewed as a security. Every syndicate must be registered with the Securities and Exchange Commission (SEC).
Joint Venture or Syndicate: Which Is Best for Your REI Goals?
Your current financial situation and lifestyle will determine the ideal method of property investing for you. After considering your present circumstances, you may want to consult your accountant, a financial advisor or a real estate attorney. These experienced professionals can advise you about which method of real estate investing is best for you. They can help you decide whether to choose joint venture or syndicate investing.
When comparing joint ventures (JVs) and syndicates, you will find that syndicates are more costly to form. This is because you are required to register with the SEC. You must also produce supporting documents with the advice and assistance of a securities attorney.
If you form a joint venture when the correct formation structure would be a syndication, the resulting entity is non-compliant with current securities laws. The serious error may result in tens, hundreds or thousands of dollars in legal fees as well as SEC fines and more.
What Is a Multifamily Real Estate Syndication?
A multifamily or apartment syndication is a syndicate in which passive investors (limited partners) pool funds to purchase an apartment building. The sponsor or syndicator (general partner) then executes and manages the investment deal’s business plan. The risks and financial returns are shared among the investment deal participants.
Qualified Investors in a Syndication Investment
To become a passive investor in a multifamily syndication investing project, you are required to qualify as an accredited or a sophisticated investor. To become an accredited investor, you must have an annual income of $200,000, or of $300,000 jointly with your partner or spouse, during the past two years. You can also quality as an individual with a one million dollar net worth.
To quality as a sophisticated investor, you must have knowledge and experience in financing and business to make a non-monetary contribution that is considered equally valuable to the accredited investor’s capital input. You must have the skills and understanding to assess the merits and risks of any prospective investment deals.
How Sponsors and Passive Investors Profit in Multifamily Syndications
In the majority of apartment syndications, the total profits are split between the sponsor and the passive investors. The split percentage can range from 50/50 to 90/10 (passive investors/sponsor). However, another common percentage is 50/50 for experienced sponsors and 70/30 for those who are less experienced.
In some syndications, the sponsor is offered a preferred return. The balance of the cash flow is then split between the sponsor and the passive investors. When the investment property is sold, the passive investors are issued the remainder of their monetary investment.
They may also receive the amount of the preferred return that has not yet been paid out. Next, the sponsor is issued a “catch-up” payment according to the profit split. The balance of profits are then split between the passive investors and the sponsor.
Some sponsors may structure the syndication investment so that the profit split is altered after a specified rate of return for the passive investors is accomplished. As an example, if the profit split percentage is 70/30 until the passive investors are issued an internal return rate equaling 16 percent, the profit split may change to 50/50.
Pros and Cons of Syndicate Investing
Major pros and cons of real estate syndicate investing are as follows:
Pros
- Above average financial returns for passive investors and sponsors;
- Lower risk for participants than other investment strategies offer;
- Passive investor knowledge of the exact property being invested in;
- Passive investor knowledge of the strategy that the sponsor is using to gain the greatest possible financial return on the investment;
- Ability to conserve funds for diversifying your property investment portfolio; and
- Money in your mailbox from cash flow.
Cons
The cons of investing in real estate through a syndicate are the following:
- Your investment money is tied up for the duration of the syndicate deal; and
- Passive investors have no control over the deal.
What Is a Joint Venture Multifamily Property Investment?
Joint venture real estate investing enables multiple individuals or companies to pool resources to make an investment in a multifamily property. All of the investment parties combine their knowledge, skills and expert experience along with their capital to invest. Many investors prefer joint ventures to partnerships for property investing. This is because in joint venture investing, each party operates as a separate legal entity.
Qualified Investors in a Joint Venture Multifamily Property Investment
In order to participate in a joint venture multifamily real estate investment, potential investors must be able to contribute to the investment deal. Along with capital, they have relevant knowledge, skills, experience and expertise to qualify as an investor. The ideal joint venture property investing project includes investors who have diverse knowledge, skills and expertise related to property investing.
This creates a well-rounded and strong investing team, which is essential for investing success. Those qualifying investors with smaller amounts of capital to invest will contribute more of their time and talents to the deal.
How Investors Profit in a Joint Venture Multifamily Property Investment
In a joint venture property investment, the partners may split returned profits on the investment according to a pre-agreed percentage. A preferred equity situation may also exist. The major advantage for the JV partners is that they fully understand the profit division structure before the property investment is executed.
Pros and Cons of Joint Venture Multifamily Property Investing
The pros and cons of joint venture multifamily property investing include the following:
Pros
- Shared resources among the participating investors;
- Shared risk and shared costs;
- Good possibilities of acquiring additional capital from partners if needed; and
- Combined credibility of its individual investors.
Cons
- Lack of total control for investing partners;
- Limited equity from some qualified investors;
- Challenging conflicts among partners to be resolved; and
- Possible unequal contributions of time and talents by some partners.
Concluding Thoughts
Many investors who are new to multifamily real estate investing wonder whether to participate in joint venture or syndicate investing. As an investor in a joint venture property deal, you will join with other investors in contributing to the investment project. Each partner invests time, knowledge, experience, expertise and capital in the deal. Partners who have less funds to invest give more of their time and talents. Risks and profits are shared according to a pre-agreed structure.
Investors in a multifamily real estate syndicate property investment are passive investors. They pool their capital to fund the investment deal. The investment is then transacted and managed by the syndicate sponsor. All parties share the risks and the profits, according to a preset percentage. However, this percentage of returns may change during the duration of the investment. At the time that the property is sold, the profit is also shared according to percentages.
After performing research on both joint venture and syndicate multifamily investing, you will know better which is the best for you. It is also a good idea to consult an accountant, a financial advisor or a real estate attorney before investing. These professionals can give you excellent advice before you decide to engage in either joint venture or syndicate property investing to achieve profitable results.