5 EXCELLENT WAYS TO INVEST IN MULTIFAMILY PROPERTIES, PASSIVELY

Like Choosing Your Ice Cream Flavor

Similar to the girl trying to decide which flavor of ice cream to choose, you and I have choices as to our investments.  One of the decisions concerns the investment class – stocks, bonds, mutual funds, gold, bitcoin, real estate, etc.

This article focuses on real estate, because investing in real estate is a proven way to build wealth.  It is good at generating regular passive income, too.

Now the decision.  Will I be an active investor or a passive investor?

The problem many of us face is having the time, expertise, or desire to manage properties directly.  We want to be what are called “passive” investors. 

We want to benefit from the power of real estate to generate income and long-term wealth, without the day-to-day responsibilities.  If you are realizing that multifamily properties are a great way for you to generate steady income and benefit from long-term appreciation and perhaps some tax benefits, explore five excellent ways to invest passively. 

We will also analyze the pros and cons of each method, and what you need to know before diving in. Does this sound good?

UNDERSTANDING PASSIVE REAL ESTATE INVESTING

Passive real estate investing for us involves providing capital for multifamily real estate ventures without taking on the active role of property management or direct involvement in the operations.

You can benefit while “outsourcing” the work of managing tenants, handling repairs, and other day-to-day tasks.   

Multifamily properties are particularly attractive for passive investing because they offer economies of scale, diversified income streams, proven resilience during economic downturns, and leverage inflation for growth.

Many people like you have received significant boosts in their passive income and sometimes amazing growth in their net worth in recent decades by investing in this asset class.  We are connected with a few of the top operators in the country.  We continue to see opportunities that offer significant estimated returns, in excellent markets, managed by skilled operators.

If you would like to participate in some of these, read on.

PROS OF INVESTING PASSIVELY IN MULTIFAMILY PROPERTIES

–          Income.  Multifamily properties generate rental income from multiple units, providing a more reliable source of cash flow than single-family rentals.

–          Economies of Scale: Managing multiple units within a single property can lead to cost savings in maintenance, management, and operations.

–          Diversification:  Investing in multifamily properties spreads risk across multiple residents, reducing the impact of vacancies or non-payment.

–          Appreciation Potential: Multifamily properties, especially in growing markets, have the potential for significant appreciation over time.  This is especially true with “value-add” deals which increase net income and thus value.

–          Tax Benefits: Real estate investments offer various tax advantages, including depreciation, which can offset income and reduce your tax liability, depending on the type of investment you make.

–          Leverage:  Many of these opportunities also include bank financing for 60-75% of the purchase, thus “leveraging” the return without the use of your credit.

CONS OF INVESTING PASSIVELY IN MULTIFAMILY PROPERTIES

–          Lack of Control: Passive investors have little to no control over the day-to-day management or strategic decisions related to the property. 

–          Illiquidity: Many passive real estate investments require a long-term commitment, such as three to seven years, and it may be difficult to access your capital before the investment period ends.

–          Dependence on Others: Your returns are dependent on the performance and decision-making of the general partners or fund managers.

–          Market Risk: Similar to most other investment instruments, real estate is subject to market fluctuations, and there is always a risk that the property may not perform as expected.

–          Fees: Various fees associated with passive investing, such as management, performance, and platform fees, can reduce overall returns.

WAYS TO INVEST PASSIVELY IN MULTIFAMILY PROPERTIES.

#1 REAL ESTATE INVESTMENT TRUSTS (REITS)

 A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs are often publicly traded on stock exchanges or privately held. Some examples are: 

–          Equity Residential (EQR) one of the largest and most established funds.  It focuses on high-demand urban and suburban markets, such as New York, Boston, San Francisco, and Los Angeles.  With this emphasis on properties with high-income residents, this fund is very stable and makes consistent dividend payouts.

–          AvalonBay Communities, Inc (AVG) a major player, with a focus on high-growth markets in the Northeast, Mid-Atlantic, and Pacific Northwest.  The portfolio is spread across high-demand coastal markets.

–          Camden Property Trust (CPT) which owns and operates multifamily properties, primarily in the Sunbelt, cities like Austin, Houston, Tampa, and Charlotte.  They have high quality management and stable cash flow.

Investing in a REIT allows you to buy shares in a company such as those above that owns multifamily properties, thereby earning a portion of the income generated without directly owning the property.

        PROS.  Publicly traded REITs are bought and sold on the stock market which provides greater liquidity than some other ways of investing passively.  They have a large, diversified portfolio, reducing risk.  They have lower entry costs.

        CONS.  They are subject to stock market fluctuations which can affect the value of the investment.  They have management fees and expenses which can impact returns.  They tend to offer returns lower than some other approaches.

#2 CROWDFUNDING PLATFORMS

Real estate crowdfunding platforms pool money from multiple investors to fund real estate projects, including multifamily properties. These platforms typically offer a range of investment opportunities with varying risk profiles, allowing investors to choose deals that align with their financial goals.  Here are some examples:

–          Fundrise, one of the most popular, offers a range of options.

–          RealtyMogul, a well-established platform.  Accredited investors can participate in individual deals.

–          CrowdStreet, a leading platform, focuses on commercial real estate, including multifamily properties.  Caters to accredited investors.

PROS.  Low minimum investment, similar to REITS.  They offer the ability to diversify easier with multiple investments.  Transparency, detailed information, including financial projections and updates are included.

        CONS.  Not as liquid as REITS, capital is locked up for several years.  Fees may limit returns.  Success is dependent upon the platform.

#3  PRIVATE EQUITY FUNDS

Private equity real estate funds pool capital from multiple investors to purchase and manage a portfolio of properties, including multifamily assets. These funds are managed by professional investment firms that handle all aspects of the investment, from property acquisition to management and eventual sale.  Examples include:

–          Blackstone Real Estate Income Trust (BREIT).  Largest and most respected.  This fund focuses on income-producing real estate, most often in high-growth markets.

–          Brookfield Asset Management, a major player.  Some dedicated funds invest in multifamily, focusing on prime locations.

–          Starwood Capital Group, a leading firm, specializing in real estate, with a long history focusing on value-add opportunities.

PROS.  Professional management, deep industry knowledge, diversification, potential for high returns.

CONS.  May not be available to individual investors.  Often require a high minimum investment, are not as liquid because of the long holding periods, fees might impact returns.

#4  SYNDICATIONS

Real estate syndication is a partnership between investors to collectively purchase a property.

In a syndication, there are typically two roles: the general partners (GPs) and the limited partners (LPs). Both are important. 

The GPs, also known as sponsors, are responsible for managing the investment, including finding the property, securing financing, and overseeing day-to-day operations. They are the “active” investors. 

The LPs, on the other hand, provide capital and receive a share of the profits without being involved in management.  They are the passive investors.

Both personally and as a company serving others like you, we at Attune Investments prefer syndications over the other choices when it comes to being passive investors.  In fact, we are passive investors in several multifamily properties around the United States.

As Attune Investments, we identify and investigate the best sponsors or operators in the country.  We spend time with them, meet with them in person.  We ask many questions as a way to sort out the best among the best.

When we know and trust an operator with a solid track record and excellent team, we wait for them to put a contract on a property in a location we believe has high potential for growth and solid projected returns.  We perform our own analysis of the property – location, income and expense records, rent rolls, competition, and the plan for taking over, improving, and operating the property.  We compare our underwriting with theirs and ask more questions.

If we are sold personally on the deal, we partner up with the operator, invest our own funds and help them raise capital, sharing the opportunity with our investment partners. 

Once the deal closes, we are like a concierge with our investment partners in the deal going forward, all the way to the exit.

        PROS.  Provides access to larger deals that would be difficult to fund individually.  You can invest in multiple syndications with multiple operators, thus diversifying your real estate investments.  Benefits include both regular distributions from the net operating income and the share of profits upon the sale.  Some offer the ability to refinance and use the pulled equity for other investments.  The biggest pro for us is the ability to get to know and communicate with the operators personally.

        CONS.  As with the other passive approaches, there is lack of control, or no say in the management decisions.  Investors must trust the GPs to execute effectively.  Funds are typically locked in for several years without access to the capital if needed.  The property may not perform as expected.

#5 MAKE A LOAN TO THE OPERATORS

Loan money to the operators instead of investing to have an equity position.  The bank making the major loan to fund the deal will sometimes allow others to loan money to the operators.  These opportunities are available but limited.

The loan terms between the private investor and the operator can be negotiated as to the length of the loan, the amount of interest on the loan, and the payment schedule for the loan.

PROS.  Limited risk.  Specified return on investment.  Steady returns.  When a property is sold, the lenders get paid before the equity partners can receive their share.

CONS.  No participation in the appreciation of the asset.  Lower expectations of returns compared to those who invest in an equity position.

WHAT TO LEARN BEFORE INVESTING PASSIVELY IN MULTIFAMILY PROPERTIES

Before committing to passive real estate investing, it’s essential to educate yourself on several key areas:

#1.  Understanding the Market: Research the real estate market where the property is located. Look at economic indicators, population growth, job market trends, and other factors that could impact the property’s performance.  The better the potential for growth in the region and local market area or neighborhood, the better the potential for good returns on the investment.

As of this writing in mid-2024, some of the “hottest” markets are: 

–          Austin, Texas – a magnet for tech companies, high population growth, thriving job market

–          Raleigh-Durham, North Carolina – the Research Triangle is experiencing rapid growth, affordable living costs, young professionals seeking rentals

–          Phoenix, Arizona – population growth, affordable living costs, warm climate, job growth

–          Tampa, Florida – attracting both retirees and young professionals, robust job market

–          Nashville, Tennessee – economy is booming, rapid population growth

#2.  Due Diligence on Sponsors and Platforms: Whether you’re investing in a syndication, REIT,  private equity fund, crowdfunding platform, or in the form of a loan, it’s crucial to vet the sponsors or platform managers. Look into their track record, experience, and reputation in the industry.

The excellence of the operator is one of the best indicators of a successful multifamily investment.

#3.  Investment Structure: Understand the investment structure, including the distribution of profits, fees, and your role as an investor. Be clear on how and when you will receive returns and what the exit strategy is.  Be sure to have your accounting and legal advisors assist you in looking at the numbers and the legal documents.

Ensure you understand the legal aspects of the investment, including the terms of the operating agreement, your rights as an investor, and any potential liabilities.

#4.  Risk Assessment: Evaluate the risks associated with the investment. Consider factors like market risk, property-specific risks, and the potential impact of economic downturns.

Get in touch with your own risk tolerance.  Make sure the specific investment is a good fit for you as an investor.

Align the investment with your financial goals.  Are you comfortable with the expected returns, the risk level, and the investment timeline?  Do they match your overall financial plan?

CONCLUSION

Passive investing in multifamily properties offers a way to participate in real estate’s wealth-building potential without the hands-on responsibilities of property management.  It can also provide a stream of cash flow.

Whether you choose to invest through syndications, REITs, crowdfunding platforms, or private equity funds, each option has its own set of advantages and drawbacks.

By understanding these options and conducting thorough due diligence, you can make informed decisions that align with your financial goals and risk tolerance.

The girl at the ice cream store eventually made up her mind and chose the flavor she wanted. 

With the right approach, passive real estate investing can be a powerful tool for building wealth and achieving financial independence.  This is what you want, isn’t it?

Help Us Get To Know You Better

Join us at noon Eastern time on the third Wednesday of each month as multi-family investors network and engage in conversations about how to be better investors.  We discuss opportunities and what we are doing in the current market. 

ON WEDNESDAY AUGUST 21, 2024, 12:00 NOON (EASTERN) Join Will Bates, Attorney.  Learn about “Tax Deferment Strategies”  Ask Questions.  Connect with other like-minded multifamily investors.

Here is the Zoom Link:  https://us02web.zoom.us/j/84424739386?pwd=Sprampca7J2spFpSWZf66vq7aj1bZX.1

Engage with other multifamily investors like you.

Attune Investments provides a better return for our investors.  And we make a positive impact in people’s lives and in our world.

If you want to learn more about how others are investing with us then we invite you to join our club and request a conversation with us.  See below.

Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.  

Or you can choose to loan money, get in with a clear return, and get out earlier.  If you haven’t already subscribed to our BLOG, you can increase your knowledge and comfort with this asset class by subscribing now.  It’s free.  We publish an article every week.  SUBSCRIBE HERE And take one more step. Become a member of our ATTUNE INVESTORS CLUB in which you have more personal access to us.  JOIN HERE.