Three Easy Ways to Start Investing in Multifamily Real Estate
I remember the days that I used to drive by these large apartment buildings and wonder “Who actually owns these?” As the United States is starting to shift into more of a renter-centric nation, a growing number of investors beginning to wonder how to start getting into the apartment investing game. While the stock market made a fantastic recovery in 2021 after the initial COVID shock, many people are concerned about inflation, which could ultimately lead to instability in the equity market. Cash-flowing assets such as apartment buildings are a great way to diversify one’s investment portfolio and preserve your hard earned cash against the effects of inflation.
The challenge for most people is they don’t know where, or more practically how, to actually start. After hours of going down Google search rabbit holes, they feel overwhelmed and put the idea on a shelf, especially after realizing that managing multi-unit apartment complexes can be very labor intensive and typically takes years to reach proficiency.
Let’s start by defining multifamily investing. The term "multifamily" and "commercial real estate" are often used interchangeably; However, there are some important distinctions that need to be made. Essentially, multifamily real estate investing refers to an owner who rents their multi-unit property (apartment, townhome, condominium, or complex) to tenants.
Multifamily properties can be broken down into two categories: commercial and residential. Properties with less than four units are considered residential, while properties above five units are considered commercial. The term commercial real estate can also be used to refer to buildings like office or retail buildings. There are different implications between investing in commercial vs residential real estate that we’ll discuss later on, which is why it’s important to not lump all multifamily real estate into one bucket.
Whether you’re looking to diversify your portfolio outside of the stock market or you are just starting your investing journey and want to get into real estate this year, these are, in our opinion, the three easiest (and fastest) ways to enter into the world of multifamily real estate investing.
#1: Invest Passively
By far, the easiest way to start investing in multifamily real estate is by investing passively and letting someone you trust do the hard work! Passive real estate investing means just that - you, as the investor, do not have an active role in managing the property. You will be known as a limited partner (LP) whereas the person or company managing the investment is known as the general partner (GP). You may also hear GP’s be referred to as syndicators. A syndicator may be a person or group of people who form a company to invest in multifamily properties. They will analyze potential properties to purchase (also known as deals), raise money from investors like you, purchase the property, and execute their business plan to increase the value of the asset. Once the property is sold, they distribute the profits to the investors.
The biggest pro to this type of investing is that it is very hands off and doesn’t take up much of your time. Your time commitment comes in the form of vetting the investment deal, reviewing the ongoing reports of how the property is performing against the business plan, and doing your taxes. Speaking of taxes, this is the other main benefit that drives investors to consider real estate investing. As a passive investor, you get certain tax benefits from these types of investments known as “passive losses”, which can be used to offset the income you make passively.
The other main appeal of being a passive investor is that you get to leverage the expertise of the deal sponsors, who, hopefully, have years of experience working on managing these types of investments full time with a professional team. With the right set of sponsors, you can benefit from profit almost immediately and skip the headache of being a landlord.
The cons are that you do not have direct control over how the property is managed or how the business plan is executed. If you entrust your money with people who are poor operators or don’t know what they are doing, you risk getting a lower than expected return. This is why it is important to develop a relationship and thoroughly vet the syndication team before you decide to invest with them. To learn more, check out our article on how to become a successful passive investor, which includes tips for how to vet operators and evaluate deals.
#2: Invest in Residential Multifamily
Did you know that you can still invest in a multi unit property without having to deal with all the complexities tied to commercial real estate? It’s true! If you’re looking to take a more active role in your real estate investments, you can start with a smaller building such as a triplex (3 units) or fourplex (4 units). Remember, anything 4 units or less is considered residential real estate.
The pros of going this route is that you unlock additional tax advantages from owning a rental property, you have the opportunity to make more cash flow and can benefit from the equity value that builds up in the property (which you can later borrow against to invest in other properties), because you aren’t splitting it amongst a large pool of people like a passive investment. You control the business plan and therefore, ultimately dictate how much money you make. Also, since these are residential properties, there are less rules and complexity around purchasing and financing these deals.
The cons of purchasing an asset like a fourplex is that they do require active management, which can quickly equate to a second job of sorts, depending on how much work you’re putting into the property and your tenant profile. Also, the cash flow can fluctuate throughout the year depending on repairs, property improvement costs, and vacancies. In terms of financing, you’ll need to have a larger amount of money set aside for covering your down payment plus unexpected costs to cover issues that may arise. Of course, you can always partner up with someone who either has more experience in managing multifamily properties, possesses a skillset you need (such as handyman/contractor), or keep additional cash on hand to help mitigate some of the risk.
If you are interested in pursuing your first investment but aren’t sure how to find the money, here are a few of the top ways you can finance your deals.
#3: Join an Educational Program
Networking and building relationships within the real estate investing community is always valuable, whether you’re looking to be an active or passive investor. But taking it a step further and committing to an actual mentorship or educational program that can guide you step by step along the way can help accelerate your progress. If you’ve ever been a part of any paid courses or programs, you know that just being surrounded by like minded individuals can help you stay motivated and on track to meet your goals.
One of the major pros of joining a program is that these groups typically have limited cohorts so you can get your specific questions answered and take advantage of perks like accountability partners. Plus, you get to learn from others who have already been through what you’re trying to do and can hold your hand along the way, allowing you to avoid many of the common pitfalls you could otherwise fall into. It’s also a great way to build solid relationships and potentially even find future partners.
We are big proponents of education and mentorship and feel there are really very few drawbacks to taking this approach. The only things to consider are that the more renowned the group, the more expensive the program will be. That’s not to say it isn’t worth it - but be prepared to avoid sticker shock. Think of this as an investment in and of itself. Also, be sure to work with a reputable program/group who has proven experience in the industry and provides the type of experience that will work best for what you’re looking to achieve. Be sure to truly commit once you’ve picked a program - you will only get out of it what you put into it.
If investing in real estate is on your list of goals this year, these are three of the easiest ways that you can get started and make that goal a reality. Once you’ve started, you can also begin exploring the other options. There’s no reason you can’t be both an active and a passive investor at some point! No matter which path you decide to take, remember to educate yourself, create a plan, and continue to build relationships with those who are where you want to be. If you do that, there’s no limit to what you can accomplish.
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