At any given step along your investment journey, you could find yourself at a crossroads: do you choose to invest in a syndication deal, or a joint venture partnership?
Most investors understand that finding, buying, and operating a real estate investment takes time, money, effort, and skills. But which option is better?
Like many things, the answer isn’t always clear, but we’re going to break down the difference between these two options to help you distinguish between which one is the better fit for you.
But start by asking yourself: do you want to be a passenger on the plane, or do you want to help fly it?
What is Real Estate Syndication?
In a multifamily syndication deal, multiple investors combine their resources in order to buy and operate an apartment complex. There is usually a general partnership team in place who is responsible for operating the asset and implementing the business plan. These general partners take on an active role in the deal, and are expected to make decisions that are in the best interest of the limited partners in the deal. The limited partners in the deal raise the funds needed to make the deal possible. Technically, a real estate syndication is a type of security, and every real estate syndication needs to be registered with the Securities and Exchange Commission.
What is a Joint Venture Partnership?
A joint venture is different from a syndication for multiple reasons. A joint venture involves two or more real estate investors coming together to acquire and operate a property. But in this case, each investor has a role in the operations and decision-making. Every partner in the deal has an active role in a joint venture, unlike limited partners in a real estate syndication. One partner might oversee the construction and renovations, while another partner might oversee management and operations, and a third partner can focus on the financial side of the property. It’s clear that every partner in a joint venture has something to offer aside from money, and is more involved than a passive investor.
Syndications Stand Out
Bigger Deals: Real estate syndications allow investors to access bigger properties, because they can raise more capital from more investors. Unlike a joint venture, syndications aren’t limited to the capital the active investors in the deal have access to. They can raise capital from limited partners, which allows them to acquire larger properties, like an 80 unit apartment complex or bigger. The bigger the property, the higher chance of more revenue and appreciation, and thus, potentially higher returns.
Spread Risk: With syndications, investors can diversify by investing in multiple properties rather than putting all of their “eggs in one basket,” with a joint venture. This allows them to spread their risk across different properties, markets, operators, and asset classes. Syndications also typically involve more investors, which means the risk is distributed across more people.
Hands-Off: Limited partners have no control in a real estate syndication, which is a good thing for busy professionals who simply want to make a return on their investment and don’t want to manage real estate. But this can be stressful for limited partners who want but don’t have decision-making power in a syndication.
Just a Joint Venture
Control: In a joint venture partnership, partners usually have more control and decision-making power in the deal. If an investor wants to be hands-on with the property, this is a great option, especially for those who want to pivot into real estate investing on the general partnership and owner/operator side of things.
Flexible Structure: Unlike syndications, there’s more room for variability within the structure of a joint venture partnership. Structures like a TIC can be used if a 1031 Exchange is involved in financing a deal, for example, and this can help an investor maximize their capital and save on taxes.
Higher Risk: Many argue that joint ventures have higher risk since there are less investors involved. The two resources that are most at risk for every partner in the deal are time and money.
Less Capital: Since there are less partners on the deal, joint ventures are usually limited in how much money they have access to. This can hinder an investor’s ability to acquire deals, and can also dictate the types of investments they can successfully take down. Less capital also reduces the scope of renovations and improvements the investors can conduct at a property, potentially limiting the business plan and value-add strategies that are an option.
So Which is Better?
It’s key to investigate both options - syndications and joint ventures- to determine which method is a better fit for you. Depending on your desired outcome and risk appetite, the choice between these two options plays a major role in achieving your real estate goals. Do you want more control throughout the hold period of an asset? How much capital do you have access to? How much risk are you comfortable with?
These questions will help guide you to the right strategy. It’s always important to remember that no matter which method you choose, you make sure the investment as a whole is sound, because both involve potentials for reward, and risk.
Passive investors in a syndication are like passengers on a plane with general partners as their pilot, while all partners in a joint venture are like the pilot.
So which do you want to be: passenger or pilot?