Today, both inexperienced and seasoned property investors frequently work together in the form of a joint venture or a syndicate. They make this decision since building a reputable real estate portfolio takes a lot of effort and resources. You’ll need a steady stream of money coming in for your investment strategy to go off without a hitch.
You could take your first steps into real estate investing (REI). And if that’s the case, you might be asking how best to amass the capital necessary to buy a sizable piece of real estate. The answer to this question can most likely be found via investigation and thorough preparation. The vast majority of profitable property investments are made in joint ventures and real estate syndicates.
The Significant Differences Between Joint Ventures and Syndicates
When you first discover joint ventures and real estate syndicates, it’s possible that you won’t be able to tell them apart. However, when you learn more about these two strategies for investing in real estate, you will find that they are quite different. As you learn more about how they work, you’ll be better able to decide which one is right for your investment strategy and objectives.
Joint Venture: What is it?
The term “joint venture” (JV) refers to an investment partnership with two or more individuals. Each investor in a joint venture must take an active role in purchasing and managing real estate. Let’s say you and two other investors decide to form a partnership to invest in a piece of real estate.
It could be an active role for someone with extensive expertise in renovating or rehabilitating buildings. One of the partners may be a skilled property manager, and a third can help the venture secure funding. There is a specific function for each participant in the transaction.
If you want to succeed in your investment project, all your partners need to contribute their unique abilities, insights, and expertise. Joint venture property investments do not need passive investors.
Syndicate: What is it?
A property investment offered by a third party to generate predicted returns is considered a syndicate investment. A real estate investing syndicate comprises a sponsor (or general partner) and inactive investors (or limited partners).
The job of passive investors is to pool resources to invest. The sponsor handles all other aspects of the investment. When an investment property is sold, the sponsor is responsible for handling all of the transactional details.
Securities laws classify membership in a real estate investing syndicate. The Securities and Exchange Commission mandates registration for all syndicates (SEC).
Which Is Best for Your REI Objectives: Joint Venture or Syndication?
The best approach to real estate investing for you will depend on your existing financial and lifestyle position. After reviewing your current situation, you may want to talk to an accountant, financial advisor, or real estate attorney. These seasoned experts can help you determine the optimal strategy for your real estate investment needs. Joint ventures and investment syndicates are two options they can advise you on.
The formation costs of a syndicate are higher than those of a joint venture (JV). It is due to the need to file paperwork with the SEC. You should also consult a securities lawyer to help you compile the necessary supporting documentation.
An entity is not compliant with current securities rules if formed as a joint venture when syndication would be the appropriate formation structure. Due to the gravity of the situation, legal fees, SEC fines, and other costs could easily run into the tens of thousands of dollars.
About Multifamily Real Estate Syndication?
An apartment or multifamily syndication is a group of passive investors (limited partners) that pool money to buy a property to rent out the units. An investment venture’s general partner (or sponsor) is responsible for seeing it through to fruition. Participants in an investment deal split both the financial risks and rewards.
A Syndication Investment’s Eligible Investors
As a passive investor, you must be either an accredited or sophisticated investor to participate in a multifamily syndicated investing project. Accredited investors are those who, in the preceding two years, has had an annual income of $200,000 or $300,000 when combined with their partners or spouses. You can also qualify if you have a net worth of $1 million.
To qualify as a sophisticated investor, you need to be able to make a non-financial contribution that is on par with the capital input made by the qualified investor. It would help if you had the knowledge and expertise to weigh the benefits and dangers of possible business ventures.
Benefits of Multifamily Syndications for Both Sponsors and Passive Investors
Apartment syndication is a common business model in which the sponsor and passive investors share in the profits. The ratio of sponsors to investors can be as high as 90%. On the other hand, a more frequent split is 70/30 for seasoned sponsors and 50/50 for newer ones.
The sponsor may receive a higher rate of return in some types of syndications. Both the sponsor and the passive investors share the remaining cash flow. At the time of the sale of the investment property, the remaining funds are distributed to the passive investors.
Moreover, they may be entitled to the unpaid portion of the preferred return. In the second phase, the sponsor receives a “catch-up” payment proportional to their share of the profits. Finally, the remaining earnings are divided between the passive investors and the sponsor.
There are sponsors out there who will set up their syndicated investments so that the profit split changes after the passive investors have earned a certain return. For instance, a profit split of 70/30 may alter to 50/50 after the passive investors receive an internal return rate of 16 percent.
Advantages and Disadvantages of Investing in a Syndicate
The following is a list of major positives and downsides associated with investing in real estate syndicates:
Advantages:
- Financial returns for sponsors and passive investors that are above average;
- Participant risk is reduced relative to alternative investment options;
- Knowledge of the specific property being invested in by a passive investor;
- The ability of passive investors to learn the technique employed by the sponsor to maximize the financial return on investment;
- The ability to set aside money for future real estate investments; and
- You should expect to see the cash in the mail due to positive cash flow.
Disadvantages:
The following items should be considered drawbacks when considering participation in a real estate investment syndicate:
- Money invested in a syndicate contract is unavailable for use during its tenure; and
- A passive investor does not actively participate in the transaction.
Explained: What Is a Multifamily Investment Joint Venture?
Investing in multifamily real estate as a joint venture permits several people or entities to pool their resources to buy a building. Everyone involved invests both money and their time, effort, and expertise in the enterprise. Joint ventures are favored by many investors over partnerships when it comes to buying and selling real estate. Because in joint venture investment, each participant acts as an independent legal entity.
Investors Eligible for Multifamily Joint Ventures
Prospective investors in a multifamily real estate joint venture must have the financial means to contribute to the business. They have the financial resources necessary to invest and the necessary knowledge, skills, experience, and competence in the field. The best joint venture property investment projects attract investors with a wide range of experience and talent in the field.
It makes for a more robust and well-rounded investment team, which is crucial to achieving investment success. Investors that meet the criteria but have less money to invest tend to put in more of their time and expertise.
How Partners in a Multifamily Real Estate Joint Venture Generate Returns
Partners in a real estate joint venture can agree to divide any earnings from the investment by a predetermined percentage. In some cases, there may be a preferred equity scenario. The main benefit for the JV partners is knowing exactly how the profits will be divided before the actual property investment is made.
The Benefits and Drawbacks of Joint Venture Multifamily Property Investing
The following are the benefits and drawbacks of joint venture multifamily property investing:
Benefits:
- Resources that are pooled among all of the investors who take part;
- Costs and risks are split evenly;
- Possibility of raising funds from existing investors; and
- The aggregate trustworthiness of its investors.
Drawbacks:
- The limited ability of investors to make decisions;
- Low levels of equity from a select group of institutional investors;
- Putting pressure on partners to overcome their differences; and
- One or more partners may not contribute equally in terms of time or expertise.
Final Thoughts
Joint venture and syndicate investment are often options that novice investors in the multifamily real estate market consider. When investing in real estate as part of a joint venture, you and other investors pool your resources to finance the business. Every participant contributes something to the venture, whether it is their time, skills, resources, or knowledge. Partners with fewer financial resources often provide more time and expertise. Shares of potential losses and gains are split according to an established formula.
Investors in a multifamily real estate investment syndicate typically take a hands-off approach to their portfolio. They form a consortium to finance the venture. The sponsor of the investment syndicate then handles all dealings with and management of the investment. Sharing the risks equally and all parties agree upon rewards. It’s possible, though, that this return % could shift as the investment matures. The proceeds from the property sale are also divided proportionately among the parties involved.
If you look into joint ventures and syndicates for multifamily investing, you’ll have a better idea of which is right for you. Before investing, it’s smart to get professional advice from an accountant, financial advisor, or real estate lawyer. Before deciding to invest in real estate as part of a joint venture or a syndicate, you should seek the opinion of these experts.
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