How to Invest in Multifamily Real Estate
Would you consider yourself a type A personality? Someone who’s always go-go-going? You want to figure everything out yourself and the idea of DIY doesn’t scare you? If so, maybe you’ve considered active investing in multifamily real estate. The monthly cash flow, tax incentives, and hedge against inflation make it an attractive option – why not be completely hands-on?
Knowing your options with active and passive investing, including the pros and cons of each, will help you make a well-informed decision on how to get started in real estate investing, how to invest in multifamily, and which option is right for you.
Active investing
Active investing will require more effort than passive investing. While investors may have more control over the process, the amount of work that is required of them is significantly greater.
Wholesale
Wholesaling is an active strategy that involves finding undervalued investment properties and selling them at a profit to a new buyer. Instead of focusing on long-term management, wholesaling is more hands-off and is mostly concerned with the exchange of the property.
Once you buy a property wholesale, you need to work on finding a buyer. Buyers can be locked into the deal with an option agreement, which gives the buyer an exclusive right to buy the property you are offering. If the deal falls through, you can lose your option fee, but sellers are not committed in the agreement. Often, this type of active investing works best when you already have a list of buyers in mind. If buyers are ready ahead of time, investors need to put in little or no capital of their own.
To do wholesaling right, an investor needs to know the market like the back of their hand. Time is of the essence – the faster you close, the more you stand to turn a profit. You need to have an understanding of property value, location, and what buyers are looking for.
Competition is also high in this area – it can be hard to find undervalued properties or get to them in time to wholesale. Before you go into wholesaling, you need to think about the time, resources, and knowledge needed to maximize your returns. The better prepared you are, the more you stand to make. This isn’t a “set it and forget it” kind of process.
Fix and flip
With fix and flip, you are responsible for finding and buying a property, plus fixing it up and selling it (flipping it) to a new buyer.
Flipping a property is a shorter-term commitment that serves as a middle-of-the-road active investment strategy.
When flipping houses or multifamily units, investors need to be mindful of improving the properties in ways that will maximize the value, moving quickly (but not too quickly to sacrifice quality), balance profit with the taxes from income, and keeping up with the fluctuating market. Home values, mortgage rates, and hot areas can change before a house is finished and ready to sell. While this can be a rewarding, hands-on experience, it’s not for someone who wants to get in and out with as little work as possible.
The timeline makes a big difference in the taxes you will need to pay on a fix and flip. If everything is completed in a year, from purchase to flipped sale, the profits will be taxed as income. If it takes longer than a year, the profits will be subject to capital gains tax, which is often lower than income tax. Of course, you need to weigh this alongside keeping the property for longer before selling and turning a profit to decide what strategy makes sense for you.
Buy and hold
In a buy and hold strategy, investors purchase a property, which could be single-family homes or multifamily rentals, and hold it to rent out to others. When you buy and hold, you may take on all of the responsibilities of fix and flip, with the added duties of managing the property, finding tenants, maintaining the facilities, hiring staff, and making sure tenants are current on rent.
A fix and flip may even turn into a short-term buy and hold: You may decide to keep the property for a year or two and rent it out, selling it after the lease is up. While some of the income from rental properties is passive, there is still a lot of active work to be done along the way. There will never be a time when investors are completely done managing a property unless they find an airtight property management company that can operate fully without them but will also eat into your margin.
Buy and own commercial real estate
Buying and owning commercial real estate is a broad category that can include many different types of real estate and different levels of involvement for ownership. This can include multifamily, retail space, hotels/hospitality, industrial, mixed-use, office, land, and more.
Whatever property you choose to buy and own, you need to be intimately familiar with that property type’s idiosyncrasies in your market. What are people in the area looking for in terms of offices? How many hotels do tourists already have to choose from? What kind of industries are growing in your area and may need space for assembly or warehousing?
All active investing involves a significant level of responsibility for the investor, even if the plan is to hand it off quickly. These strategies are not for someone doing this casually. They require care, attention, and a lot of know-how.
Passive investing
Passive investment requires much less of the investor. While it’s still good to be educated on where your investment is located and basics of the market, most of the actual legwork will be done by others, allowing you to reap the benefits via passive income without breaking a sweat.
Syndication
With real estate syndication, multiple investors bring together their resources to fund one investment. Generally, this allows investors to take part in projects bigger than they would be able to afford on their own. It’s not uncommon to invest in commercial buildings or multifamily properties through syndication.
When you invest via syndication, you know the team and the property. You know the physical address and can visit and see the property. There are also fewer fees associated with syndication compared to other investment strategies.
General partners or sponsors (also known as real estate syndicators) spearhead the strategy and find the investors. The passive investors bring what they can to the deal. Limited partner investors (LPs) can also be involved – they have less responsibility and liability compared to GPs and also take a smaller share of returns compared to GPs.
REITs
Real estate investment trusts (REITs) are enterprises specializing in the management of real property assets. Most of the largest REITs may be purchased on the stock market. It’s usually preferable to invest in more than one REIT.
Considering a portfolio of real estate stocks can help protect against some of the uncertainty when investing in properties you’re not likely to see in person. The low point of entry for REITs and other forms of real estate stock can make it a good initial investment, but it isn’t as tangible as syndication.
Other fund options
You may also consider other funds. Real estate ETFs, mutual funds, and private funds are similar to REITs. In each, you’re investing in a portfolio of properties. With REITs, you’re usually directly investing in real estate. Other funds might invest in several REITs or stocks related to real estate. There’s another layer of removal from the property itself.
Crowdfunding is one of the simplest options for people starting out as real estate investors. Some crowdfunding platforms, like Fundrise, have a minimum investment of only $10. Others, like Crowdstreet, have a minimum investment of $25,000.
With some crowdfunding, your investments may feel more tangible, and in others, they may feel more removed. It all depends on the platform, the size of your investment portfolio, and how far away you are from the properties.
In conclusion: There is no “right” way to get involved in multifamily investing, but it’s important to know what each option entails.
Like all things in life, there isn’t one right way to do anything, including investing in multifamily properties. The most important thing when it comes to investing is to start. Make a commitment to invest in a way that works for you and stay persistent.
One thing is for certain. Passive investing is a much lower time commitment and can produce steady returns when paired with knowledgeable partners that know how to hedge against inflation, weather economic turbulence, and choose investments in areas ripe for growth.
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