Multifamily real estate investing involves purchasing a residential property that houses multiple separate living units. This could range from a duplex, which has two units, to larger apartment buildings with hundreds of units. As a limited partner (LP), you would typically invest money into a deal structured by a general partner (GP) or syndicator who manages the property. The returns are then distributed based on the partnership agreement
There are several ways to invest in multifamily real estate, each with its own risk and reward profile:
Direct ownership: This is when you purchase a property outright. You’re responsible for the mortgage, managing the property, and all the potential profits (or losses) are yours.
Real Estate Investment Trusts (REITs): REITs are companies that own and operate income-generating real estate. You can invest in a REIT by purchasing shares through a broker, similar to how you would buy other stocks. This provides a way to invest in real estate without having to buy a property yourself.
Real Estate Limited Partnerships (RELPs): This is a partnership arrangement where you invest money but are not involved in management (similar to being an LP in a syndication). Instead, a general partner takes on those responsibilities.
Real Estate Syndication: This is a group investment where you pool your money with other investors to buy a property that would be too expensive to purchase individually. As an LP in a syndication, you invest money but are not involved in day-to-day management.
Real Estate Crowdfunding: This is similar to syndication but facilitated through an online platform that connects investors with real estate developers or projects.
An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are recognized as having the necessary financial awareness and means to handle the potential risk associated with these types of investments.
Currently, as of 2022, in the United States, an individual can qualify as an accredited investor by having an annual income of $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or higher income in the current year, or having a net worth exceeding $1 million, either individually or jointly with a spouse (excluding the value of the person’s primary residence).
This matters in multifamily real estate investing because many investment opportunities, such as certain syndications, private placements, or other alternative investments, are only open to accredited investors due to their complex nature and the higher level of risk compared to traditional investment vehicles. Always check the most recent SEC rules or consult with a financial advisor to understand the current definition and regulations surrounding accredited investors.
Multifamily real estate offers several potential benefits. They often generate steady cash flow from rent payments, which can be distributed to LPs. The demand for rental units tends to remain strong, and it can even increase during economic downturns when home ownership becomes less affordable. Multifamily properties can also benefit from economies of scale in property management, repairs, and maintenance. As an LP, you can enjoy these benefits while the GP handles the day-to-day operations.
When comparing multifamily real estate to single-family homes, there are several key differences. Multifamily properties often provide a higher income potential due to multiple rent payments. They also offer risk diversification; if one unit is vacant, the others can still generate income. As an LP, investing in a multifamily syndication can also provide access to larger, more profitable deals than might be feasible with single-family homes.
There are several key metrics used to evaluate the potential return on a multifamily investment. Cash-on-cash return calculates the annual income over the invested cash. The capitalization rate, or cap rate, is the ratio of the net operating income to the property purchase price. The internal rate of return (IRR) calculates the annual growth rate over the life of the investment. As an LP, you’ll typically receive these figures from the GP or syndicator, but it’s important to understand what they represent.
Investing in multifamily real estate has several tax implications. Rental income is taxable, but investors can also deduct applicable expenses such as mortgage interest, property taxes, operating expenses, and depreciation. In certain cases, investors may also be eligible for tax benefits such as the pass-through deduction under the Tax Cuts and Jobs Act or benefits associated with investing in Opportunity Zones. As an LP, these tax benefits often pass through to you, but it’s important to consult with a tax advisor to understand the specifics.
Common mistakes in multifamily real estate investing include not conducting thorough due diligence, underestimating operating expenses, overpaying for a property, and not vetting the GP or management team adequately. As an LP, you’re not typically involved in the day-to-day management, but it’s still important to understand the market, the property, and the team you’re investing with. Always review the business plan and projections, and don’t be afraid to ask questions. Another common mistake is not considering exit strategies. A good investment should have a clear plan for how and when LPs will receive their return on investment. Finally, it’s important to understand that real estate is a long-term investment and patience is often key to seeing the desired returns.
Investing with Mission Equity Capital is a straightforward process. We’re dedicated to providing personalized service to each of our investors. The first step is to set up a 15-minute call with us. During this call, we’ll discuss your investment goals, answer any questions you have, and provide you with all the necessary information about our investing process. We aim to make the process as transparent and simple as possible. To schedule your call and start your journey in multifamily real estate investing, please click here.