Joint ventures and syndicates: What’s the difference?
Investing in real estate is one of the most effective ways to grow your own personal net worth, improve the financial future of your heirs, and create a legacy for yourself that will last long after you’re gone. As an investor, it’s important that you understand all of the different options and investment structures available to you. When many people hear about real estate investing, they immediately think about the fix-and-flip structure that they see on TV shows. While that’s certainly one option for real estate investors, it’s far from the only choice. Two investment options available to you are joint ventures and real estate syndicates. While some misinformed individuals use these terms interchangeably, they are actually quite different. Understanding the differences in joint ventures and real estate syndications can help ensure that you’re choosing the investment structure that is best for you.
What is a Joint Venture?
If you’ve ever watched ABC’s “Shark Tank” or CNBC’s “The Profit,” you’ve seen the concept of a joint venture at work. On these shows, investors not only put money into an existing business, but they also actively engage with the business owner to create policies, procedures and products that can help enhance the business. Essentially, everyone who has money in the business is actively engaged in helping to improve the business, thus increasing their own returns on investment.
In most cases, joint ventures involve two or more investors who compliment one another. For instance, maybe one partner has an abundance of time and knowledge about real estate investing but he or she lacks the funding necessary to make a deal happen. Conversely, the other investor has plenty of cash, but doesn’t have the time to scout out potential properties or the industry expertise necessary to determine what properties would be a good investment. In these cases, a joint venture would benefit both parties, as the partner with time and know-how can choose the properties and manage the investment while the partner with the money funds the process. When profits are generated, the partners can split them however they agreed to do so at the beginning.
What is a Syndication?
While a joint venture requires all investors to be actively engaged in nurturing and managing the investment, real estate syndications (also referred to as real estate syndicates) allow for truly passive investing. Under a real estate syndication, the sponsor (also called a syndicator) is responsible for finding one or more properties that he or she believes could provide a positive return on investment. Ideally, the syndicator is an experienced real estate investor and knows how to find the right kind of properties.
Instead of using his or her own money to purchase the property and to perform any upgrades, repairs or maintenance necessary on it, the syndicator will bring in investors. These investors have absolutely nothing to do with the property itself. They don’t worry about repairs, maintenance, advertising or anything else pertaining to the property. Instead, they simply provide funding to the syndication and the sponsor determines the best way to spend it.
After the property is sold or when rental income starts coming into the syndication, the profits are distributed among the investors according to the type of structure that the syndicator and the investors agreed upon at the onset. There are a variety of different syndication structures, so it’s important that you educate yourself on those options so you can choose a syndication that best suits your own investment goals.
Both joint ventures and real estate syndicates provide you with an opportunity to increase your own net worth while solidifying the financial future of your children, grandchildren and other heirs. However, it’s important to understand the difference between these investment options, as joint ventures require a much more hands on approach. If a passive real estate investment strategy is more your style, you will be much better served by opting for a real estate syndication.