Starting As A Passive Investor In Multifamily Apartments
What You Need To Know!!!
Would you walk up to someone in the street and hand them $50,000?
Probably not. Why?
Because you don’t know if it is a sound investment.
You have no idea what that person will do with your money. They might blow it all or they might make clever investments with it.
Without doing some research into who they are and how trustworthy they are, you will never know.
The same applies when you are considering passive investing in multifamily apartments. Yes, multifamily apartments can be a great investment, but only if the investment is handled in the right way.
Let’s look into how you can get started as a passive investor in multifamily apartments and how you can do it correctly.
What Is Passive Investing?
What can you do if you have the capital, but lack the knowledge (or the time) to invest in multifamily apartments?
The answer could be Passive Investing. But what is it exactly, and how does it work?
Passive investing allows you to pool your money with other investors in a syndicate or Partnership to buy a property that will show you all a return. Investing through a syndicate allows you to leverage the specialized knowledge of real estate experts to passively increase your income and net worth.
You contribute a sum of money to the syndicate and collect financial returns on the deals made within the collective. There is no need to manage a property, deal with tenants, or take the full weight of the investment on your shoulders.
It can be a great way to dip your toes in the investment waters. While you are learning about the process, the terminology, and how to assess good investment opportunities, you can still be building capital and cashflow.
Basically, you reap the benefits of someone else’s hard expertise!
However, to see those benefits, you still need to be a little savvy. Passive investing does not mean that you should be completely hands off in the process. You still have to ensure that you are making wise decisions with your money.
Why Multifamily Apartments?
Investing in a single family home is often where many people look to start their investment journey. There are definitely merits to investing in these properties. However, you will often be the lone investor, need to manage the property on your own, and only be able to collect a single rental income.
However, if you invest with a multifamily syndicate, you can contribute the same amount of money, yet end up with a bigger deal. There is no responsibility to manage the property yourself and because there are more doors, there is the opportunity to collect multiple sources of rent.
The risk is much lower as you are sharing the payment with other investors. You are also able to utilize the experience and financial strength of the deal sponsor.
To invest collectively in this way, properties that were once unattainable are suddenly within reach. Everyone in the syndicate can take advantage of high-value real estate that also shows high-value returns.
So, how do you get access to this high-value stock? You need to assess the syndicate options available.
How Can You Ensure You Are Making A Good Investment?
Passive investing is not risk-free. In fact, there is actually an added risk involved. What is that risk?
It is the syndicator or deal sponsor that you are choosing to invest with. Before handing over any money, you must complete thorough due diligence to ensure you are investing wisely.
Do not have blind faith that everything will work out alright. It is still your hard-earned cash that you are risking.
While you may not have an in depth understanding of the investment world yet, you can still make sure that your sponsor does. There are a number of questions that you can, and should, ask before working with any syndicate.
These questions should be…
- What Is Your Experience? If you do not have a large amount of multifamily investment knowledge yet, you want to invest with someone that does! Ask them if they have been full cycle on a deal, how many deals that have completed, what the success rate was and if there have been any failures in their portfolio.
- How Are The Deals Evaluated? You might not understand expected returns, expenses and exit caps yet. But your sponsor should. Find out how they evaluate the validity of each deal to ensure they are making sound decisions with your money.
- What Is The Target Market? It is important to understand what market your syndicate plans to invest in. You want to ensure that it is a growing market that will show decent returns.
- Are You A Specialist In That Market? If the syndicate does not understand the ins and outs of the market, then they may choose a property in a bad part of town with a high crime rate. This will ultimately lead to a property with high vacancies. That reduces the potential income a property is able to generate.
- How Will The Cash Flow Be Managed? Understand how and when you will gain access to the returns. Will it be monthly, quarterly, or some other frequency?
- How Do You Communicate With Your Investors? Get an understanding of how you can track your investment and how often you can expect to hear from the sponsor. Will it be via phone, email, private group messaging, or webinars?
- How Is Each Deal Stress Tested? Stress testing assesses the current and emerging risks, seeking to prevent or minimize losses due to a change in economic climate. Explore how the syndicate stress tests, what the operator reserve is and if they have a rainy-day fund as a safeguard option.
- What Is The Business Plan? Find out things like how long do they intend to keep the property? Are they planning improvements and will this impact vacancies? This will help you to understand whether it is the right place to put your money.
- Who Is Involved In The Transaction? There are a lot of different parties involved in any deal. You want to make sure you can trust them all. Don’t just research the sponsor, but look at who is going to complete the transaction, who the accountant is, who is supplying legal advice etc.
- Who Will Manage The Property? You want to ensure that the ultimate level of customer service is delivered to your tenants. In order to do that, the property needs to be managed well. Look at the company handling it and also what their workload will be like. Will they be able to dedicate enough time to your property?
- What Is The Criteria To Join? Most syndicates are only accessible to accredited or sophisticated investors. An accredited investor must have an individual net worth of more than $1 million or an annual income in excess of $200,000. A sophisticated investor is someone who has the financial or business acumen to assess the merits or risks of a potential investment. Do you meet the criteria?
- What Is The Financial Contribution? You want to know what the investment is going to cost you. Most reputable syndicates will require an investment of at least $50,000. Some will accept lower contributions, but they may be less experienced or are struggling to raise the money they need to cut a deal.
As you can see, the potential to learn with passive investing is huge! Many multifamily investors start out passively before they become active investors themselves.
If you surround yourself with people that are doing what you want to do, then you can soak up all of their knowledge and experience. What once seemed hard will become easy. You will learn how to evaluate your own deals and may even move from a passive investor to a General Partnership (GP) investment.
But before you can do any of that, you need to make sure you are making great passive investments. Do your due diligence on any investment opportunity to ensure the syndicate you choose will offer great returns.