If you’ve spent any time perusing our article library, you likely have realized we’re pretty passionate about multifamily investing.
We started by developing new apartments from the ground up and it launched us to where we are today.
Now, as general partners in real estate syndications, we buy large apartments, add value, and provide our investors with financial freedom through one of the most reliable sources of passive income you can find.
Don’t Get Overwhelmed, You’ve Got This
If you’re new to rental property investing or simply trying to understand new ways in which to invest in real estate, don’t worry if you feel a little overwhelmed or confused.
It’s easy to get information overload due to the abundance of differing opinions, different asset classes, markets, and methodologies.
One real estate asset class that almost everyone is familiar with is apartment buildings.
While this isn’t the only asset class we and our investor base target, it’s our favorite overall and the one we give the most focus.
Take a look at the below chart to get an idea of why we put so much energy into multifamily.
The first thing you’ll likely notice is that the mean return for apartments is the highest with the lowest standard deviation, which is great and important, but you should also pay close attention to the Sharpe Ratio here.
This is a method by which investors can calculate a prospective investment’s risk adjusted return.
In other words, it measures the return of an investment compared to its risk.
The higher the value of a potential investment’s Sharpe Ratio, the more attractive the risk adjusted return.
As you can see here, apartments blow the other real estate asset classes out of the water.
Great, How Do I Get Involved?
There are several ways to do so that we will outline in this article. Two of the methods are forms of active investment and two are forms of passive investment. As the names imply, active investment involves you taking a hands-on role and fully managing all aspects of your investments, whereas passive investing involves minimal responsibilities for you as the investor.
1. Active Investing as a Single Operator:
It’s All on You
This is the method that comes to mind for most people when they think of getting involved in real estate investing. In this model, all the responsibilities are on your shoulders.
This is an extremely time consuming approach that I would not recommend, but has worked very well for some people.
A big part of this might be down to your personality.
Do you enjoy creating things all on your own, even if that means you are taking on many roles simultaneously to do so? Then this might be worth considering.
Ultimately, it’s going to come down to what your goals are for your multifamily investments.
If running a business on your own and taking on a challenge by yourself appeals to you, then this could work for you.
Work Harder AND Smarter
If you’re looking for a more passive income stream (cash flow you don’t have to continuously work to earn), this method is definitely NOT the one I would recommend.
If you’re looking to do what our company does and scale up to raising capital for larger purchases, then this method absolutely cannot work.
In my opinion, real estate investing is a team sport and the amount of players needed for your team increases as you scale up to more complicated investments.
You can find success in this method, but it will require you to be the one who sources deals, analyzes deals, performs due diligence, acquires financing, oversees any renovations upon purchase, and manages the asset.
Very successful solo operators typically stick to mid sized apartments and many of them self manage their properties for additional income.
2. Active Investing through a Partnership:
This is similar to investing as a solo operator, but should be much more realistic for the average person if the partners work well together.
Everything that is true of investing as a solo operator is true of investing through a partnership, but the load is spread across however many partners are involved in the deal.
Years ago when we first started our company and purchased our first property, it was a four person partnership.
That collaborative process where we leaned on one another and played to each team members’ strengths set the foundation for what our company has become today.
Of course, your profits will be reduced proportionately as to each partner’s percentage of ownership, which causes many people to reject this approach, but I think that’s short-sighted.
Human beings are a social, cooperative species and we accomplish more when in a group all focused on achieving a common goal.
Play on Your Strengths
With real estate, like any business, you should be playing to each team member’s strengths in order to get the most out of the different skill sets everyone brings to the table.
In Ray Dalio’s Principles, he outlines an extremely refined version of this concept where every employee underwent personality assessments and were given cards that other team members could reference to understand everyone’s strengths and weaknesses.
Every member of our company took the DiSC personality profile assessment, which can help you understand not only what tasks people might best be suited for, but how their personality operates.
It will change the way you approach a partnership when you realize that your partner has a high score for conscientiousness, for example, and you both then realize that is why he/she is often the one who is crossing every “t” and dotting every “i” — they’re a details person and their role should reflect that.
(The DiSC profile can be found here: https://www.discprofile.com/ ).
3. Passive Investing Through a Real Estate Syndication
This is a form of crowdfunding real estate investment.
A group of skilled real estate industry professionals form what is called a syndicate in order to pool funds from their investor base to purchase a larger and more expensive asset than any individual investor would likely have been able to purchase on their own.
Real estate syndications are a truly passive form of real estate investment that do not require any work on the part of the individual investors beyond judging the merits of the deal before they invest.
The operators who bring the deal together are called general partners and the investors are called limited partners.
The general partners do all of the work involved with the deal, from sourcing new deals, due diligence, obtaining financing, and asset management, while also investing their own capital alongside their passive investors.
Economies of Scale
This allows everyone to benefit from economies of scale collaboratively and gives tremendous benefits to the investor who wants to be involved with real estate, but isn’t interested in the stress involved with being a landlord.
A typical multifamily syndication will have a hold period of anywhere from 2-10 years, depending on the business plan.
During the hold period, investors receive cash distributions every quarter, much as they would in an active real estate investment.
After that period, the asset is sold and the profit is divided between the investors.
The reason why this method is most appropriate for many people is that all of the typical benefits of real estate are still enjoyed by the passive investors without the burden of learning how to be a great landlord.
Getting the Best Help
You can rely on professionals with years of experience that work on this full time to handle that.
Yet as a passive investor, you’re still getting regular cash flow distributions, a hefty cut of the profit when the building is sold at the end of the hold period, and tax benefits like depreciation, just as you would as a solo operator or within a partnership.
In fact, due to economies of scale, certain strategies for reducing your tax liability such as cost segregation become feasible.
Check out our Benefits of Depreciation & Cost Segregation Studies for Real Estate Investors Explained article for a more in depth look at that topic.
Investing in a multifamily syndication is the method by which normal individual investors can become involved in truly institutional-grade real estate investments, such as 100+ unit apartment buildings.
There are a number of advantages involved with scaling up to buildings of this size, such as access to best-in-class property managers in your target markets, more favorable debt financing, and even better returns per unit than smaller multifamily properties!
4. Passive Investing through a REIT:
REITs, or real estate investment trusts, are another popular option for passively investing in multifamily.
REITs are large companies that invest in real estate.
You can purchase shares of the company itself, rather than a stake in the properties as you would in a real estate syndication.
REITs typically focus on a specific real estate asset class that they specialize in, including multifamily apartments.
In many respects, REITs have more in common with stocks and bonds than they do with typical real estate investments.
You are investing in the company above all else and you are not given the chance to evaluate each asset the REIT adds to their portfolio. You are simply along for the ride.
In this respect, REITs are an even more passive option than a real estate syndication because they remove the only responsibility a passive investor has in a syndication: evaluation/due diligence on individual deals.
Income distributions are not tax deductible, as they come in the form of dividends.
This is more appropriate for some investors who might not feel comfortable or competent enough to evaluate each new opportunity, but in my experience this is the role investors enjoy and put a lot of emphasis on.
Every investor wants to grow their money and they hope to do so as a result of their ability to judge individual opportunities and see which one is best.
Many people may feel uncomfortable having no ability to evaluate each acquisition as it comes in.
Skilled investors rightfully take pride in their ability to judge the individual investments on their own merit, rather than allow someone to handle that for them.
When you compare them to a real estate syndication, REITs are more directly susceptible to market forces.
Unlike syndications, where you have equity in a physical asset that protects against a complete loss of your investment, the value of your shares in a REIT are directly related to the market value.
This does not imply that REITs are a bad investment; on average they outperformed the S&P 500 over the past 20 years and are a great option if you do not enjoy or want to take part in evaluating individual private offerings.
That said, the average annualized return for REITs over that period was 9.1%, whereas a multifamily syndication managed by skilled operators could deliver far greater returns than that (15%), especially when a value-add strategy is properly implemented under the right circumstances to drive up the property’s net operating income and value.
An advantage REITs have is their liquidity. You can sell your shares of the company at any time, as opposed to a syndication where you are a partial owner of the asset.
Note that it is possible to sell your share of an ownership stake in a syndication as well, depending on how it is structured, but it is obviously less liquid than a share in a REIT.
Keep in mind that investing in REITs comes with associated fees that are much higher than a typical real estate syndication.
If you spend enough time in the real estate industry, you’ll cross paths with people that have had success investing using each one of these methods.
It’s really up to you as the individual investor to decide what method fits your lifestyle and goals.
If your goal is passive income and you don’t want to add any more working hours to an already busy schedule, then I would recommend giving some real consideration to the passive options of real estate syndications or REITs.
If you have a dream of being a real estate professional and enjoy getting down in the trenches as a landlord, the active role might suit you best.
It’s just good to know there are options out there that allow every kind of investor to get involved in multifamily real estate.