Multifamily Investments - Risks Factors & Fees

[Jorge Abreu]

No matter which investment strategy you use, make sure you have knowledge of all the basics to understand risks and fees that could eat into your returns. Of course, you should do this before you dole out any money or sign on the dotted line.

👉Stock Market Risks

Compared to real estate, the stock market is much more sensitive to exogenous factors and systematic risk, like interest rate changes by the Federal Reserve. There is also the risk of a bad company earnings call or sudden material news that changes the trajectory of the stock price. Usually, this happens all without warning. And let’s not forget the other variables that can still greatly impact the stock market, like the media or political turmoil. Things like policy changes and war can cause major price swings. And again, they are entirely out of the investor’s control.

👉Multifamily Risks

All investments carry risk, and real estate is no different. While multifamily investments are more protective against market corrections than stock investing, they’re not entirely immune. In a cyclical market, real estate asset values can also correct, but cash flow can offset dips in market value and help you budget for unexpected expenses. It’s also crucial that your property is well managed. Operators can reduce risk by making sure a reputable property manager is running the business effectively and efficiently, otherwise, the investment could see higher vacancy rates and a decline in revenue.

👉Stock Portfolio Management Fees

When you hire someone to actively manage your portfolio, fees will always be higher than if you just park your money in passive index funds. If you’ve entrusted your stock portfolio to a professional manager, it’s likely management and/or performance fees are taking a significant chunk of your returns. While management fees are typically in the ballpark of 1-2% of your assets, performance fees can reach double‑digit percentages. Yikes.

👉Syndication Management Fees

When you invest in a multifamily property through syndication as a limited partner, you will incur fees as well. Again, you’re hiring someone to do the heavy lifting so you can take a backseat while earning income passively. A key difference to note is that general partners will, nine times out of ten, be co-investing in the syndication. With skin in the game, they (should) work tirelessly for the best returns possible. The sponsor/general partner typically charges a transaction fee (typically 1-3% of the transaction value) and an acquisition fee (anywhere from 1-5% of the purchase price). These are standard, but some sponsors may tack on additional fees. Make sure to thoroughly review the financial documents and get a full understanding of where your money is going—and why it’s going there.

👉Market Correlation

Historically, experts haven’t found a clear correlation in price movements between the stock market and real estate prices. But there’s a debatable theory that they’re actually positively correlated, in that when the stock market does well, housing tends to also do well. When indices enter a bear market (a correction that hovers around 20% or more), that’s when we might see sentiment change and housing soften.