Joint Venture Real Estate versus Syndication
With soaring real estate prices and higher mortgage rates, is it too late to hop on the multifamily investing train? While some may say “yes,” I am here to tell you that it’s never too late.
Securing a commercial loan for a multifamily apartment or building isn’t easy, but luckily you don’t have to. Real estate joint venture (JV) and syndication can help you raise the funds you need to invest in income-producing real estate. Find out more about these options below.
What is Joint Venture (JV) Real Estate?
What is a joint venture when it comes to real estate? When one person does not have enough capital to fund a larger real estate project, they can seek the help of others. Simply, it’s two or more investors combining resources to develop or invest in a real estate project.
The idea is that by pooling money, sharing experience, knowledge, and access to various skills or people, you will have a complete set of resources for a project. Suppose you want to invest in a multifamily building, have $50,000 in your bank but need 5x that. In this case, you could partner with another investor to close the gap.
However, you cannot simply throw in money and wait for the investment to pay out. You MUST actively participate in the project. Every participant must have a defined role and actively prove they are contributing to the project. Every decision related to it must be made by majority rule. This way, everyone involved has a say.
Here are some roles JV real estate partners typically play:
- Finance manager – having one person in control of where the money is coming from and where it is going ensures that the funding pool is used appropriately and documented thoroughly.
- Property manager – as many joint ventures tend to cover larger buildings, usually multifamily complexes, this means the site will need to be managed. This includes managing tenancy and rent collection, dealing with officials regarding health and safety compliance, and ensuring that any further approvals are acquired for modification to the property.
- Property maintenance manager – Turning an old building into a new, livable complex requires a lot of time and effort. These tasks fall under the property maintenance manager, who will conduct all efforts to renovate and modify the building for use.
While knowledge and expertise can be shared, each investor must actively prove they are fulfilling their assigned tasks. This is to ensure that everyone is legally a manager in the deal and will have fair limited liability. It also prevents any single member from having more authority than the others, keeping the team balanced. A JV project is a group effort, after all.
Are Joint Ventures the Same Thing as Partnerships?
However, partnerships are used from time to time because they require less paperwork and are more flexible than JVs. Also, limited partnerships allow you to invest passively without playing an active role in the project. The downside? You take on personal liability for your actions as well as the actions of your partners. In a JV, each party has its own entity and is involved in the ongoing maintenance of the asset. Nobody is allowed to be passive.
What is Syndication?
Real estate syndication is the pooling of funds from various investors to buy larger assets and projects. There are typically two parties in property syndication: sponsor and investor. The sponsor is also referred to as the syndicator.
The syndicator is responsible for handling the project, overseeing management, disbursing income to investors, and selling the property. On the other hand, investors only have one role: putting money in a solicited property.
Syndication is typically used for buildings or projects worth $2 million or more. The person in charge of the operation is a real estate syndicator, while the others are known as investors. The syndicator is responsible for running all aspects of the project, managing the building, and dealing with any banks. Syndicators acquire external sources of income, usually to cover 80%-95% while they cover 5%-20% themselves.
For example, imagine a real estate syndicator finds a $10 million build with the potential to turn into 20 rentable apartments. They can acquire a business loan to cover the project but will require a 20% down payment. The syndicator can find investors to cover that $2 million down payment, and the bank will provide the rest, allowing the project to begin. The investors acquire profits on the property once it is sold. If all goes as planned, and in five years, the syndicator can pay back the bank loan, the investors earn back their investment, plus a percentage of the profits.
The return for these investors is still a risky investment and is entirely reliant on the project’s success and high profitability. Syndication investment is entire without involvement, however. It is the perfect passive investment strategy.
Since the sponsors are not liable for their part of the project, it must be registered with the SEC – The US Security and Exchange Commission. Syndicates are considered securities by law and so fall under the various rules that surround and protect them. Keeping the project legally covered by an SEC agent will help prevent any litigious action or illegal developments. It is a necessary expense, but one that will prevent huge legal issues should something go wrong.
Joint Ventures vs Syndication
Which option you choose will entirely depend on what you can bring to the project and what you can afford to do. JVs are a more time-consuming option as they require frequent input and constant collaboration with all involved parties. Syndication, by contrast, involves handing in your money and stepping back while others do the rest – buying, renovating, selling, collecting rent, etc. Investing in syndication is the better option for those with enough money but not enough time or experience.
With JV, you have much more control. Since you are an active part of the project, you must be present and included in all decisions and changes. It also means that you earn profits as soon as the project begins to bring them in. For those looking to get stuck in with a new project and come away with the spoils, joint venturing is the way to go.
With syndication, you must sit back and wait. Profits are only awarded as soon as the sales are made and all loans are repaid. You also benefit from rental cash flow and value appreciation of the property. If you’ve dreamt of earning big money from real estate, but don’t want to be involved in the day-to-day management of the project, then investing in real estate syndications might well be your best chance.
In the end, it comes down to which option best fits your goals. Personally, I believe getting involved in joint ventures is the better choice as you’ll be able to grow your wealth and exercise your entrepreneurial skills simultaneously. Plus, you’ll have voting rights and more deals available.
Getting Involved in Multifamily Investing
Multifamily real estate is trending and the word is out on its profitability. Compared to traditional properties, multifamily allows you to start with less and ensure steady cash flow quickly. If you’d like to invest in multifamily properties but don’t know where to start, find a great trainer and follow closely.
As a leading advocate of multifamily investing, I created the Multifamily Kickstart Investing Course to educate people on how to start investing in multifamily properties. Using Myers Methods of real estate investing, the course is designed to help you scale your portfolio or get your first deal done and go from owning nothing to many homes in a short period. After your final lesson, the knowledge you’ll possess will be more valuable than any amount of advice you receive from the gurus.
The course also covers JV and how to get deals done through this method of investing. Others don’t talk about JV in detail because the allure of multifamily is investing other people’s money. They’re like “give me $30k and I’ll look at your deals, and if you do it right, you’ll make money,” but they don’t tell you that the deal has a $100k acquisition fee and, if you’re fortunate enough to close a deal, then you may end up with $5-10k out of 100k because everyone else took their cut to front money because you didn’t have the money, to begin with. So you spend $30k with nothing to show for it, because you never get a deal done.
All other guys started as JV then moved over to syndication because they now talk more than they do. None of them started or made their money in syndication, so why are they teaching syndication? Ask yourself, do I want to learn from someone who has first-hand experience in JV and syndication, or from those who have nothing much to show beyond a fancy landing page they probably hired someone to create for them.
The choice is yours. You can keep doing what you’ve been doing, consuming piecemeal advice and letting lack of certainty keep you from profiting. Or, you can get the right education and enter the world of multifamily investing with confidence to succeed.