'Best' way to invest in multifam?

Question

Hello, BiggerPockets community

What's the most suitable method which you would prefer to invest in multifamily? And why so? Most likely, your investment decisions would be congruent with your financial goals. I'll list the options for different ways to invest below, but you can always creatively think outside the box, as they're many different methods to invest passively in multifamily real estate. Also, feel free to give any changes/ false information I've made to the graph.

If you happen to strictly invest as a sponsor, then I'd also love to learn why (this post is geared towards passive investors).

Passive investing options:

- Real Estate Syndication (typically with a relationship with the sponsor)

- Real Estate Closed-End Fund

- Real Estate Syndication(s) marketed via crowdfunding (two suboptions: investing in an individual deal/ppm, or diversified portfolio investing)

Here're some advantages I've listed for each.

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Taylor L. · Answer

I stick with the single asset syndication strategy, and have done them both as a General Partner and Limited Partner. I like the single asset syndication strategy because everybody knows what they're getting into. LPs only have one deal to evaluate and have a pretty clear path on what the exit strategy is.

Funds have increased in popularity and we have looked into it. It certainly looks like a fund could make it easier to close deals, but it could also be pressure to do bad deals.

William Costello · Answer

Syndication is a great way to invest in multifamily, however it is important to find the right syndicator and understand that it should be a relationship and someone you can trust. Knowing their experience and expertise will help you achieve what you are looking to get out of the initial investment.

Jeffrey Donis · Answer

I would do a passive investment in a syndication deal. For me, it would be the best of both worlds: I could make passive income, and learn from a general partner about how to operate a deal so I could do one on my own in the future. That is assuming the general partner would be willing to teach their passive investors. I am aware that some do not do that.

Hope that helps.

AJ Shepard · Answer

@Steven Huynh

I’m always of the advent that the more you own the better.  Just out of curiosity, why don’t you have buying a 4 plex or small multifamily on there and hiring a property manager 100% yourself?  In some cases, I would think it still be an option to consider.

In my opinion, I would try to stick with the project based.  This is also coming from someone who is already very knowledgeable in performing projects.  It requires you to keep moving your money from one to the next as they perform, but I think you will find that they typically are underwritten fairly conservatively and also may end sooner than anticipated with higher returns than advertised.

A fund, and in general, as investment size gets larger gets much harder to match large returns of a good project.  Say the fund has 15 projects and 2 of them are home runs.  They are going to have 2 dogs in there that average the returns down.  Additionally there may be some down time of when the money isn’t working.  Yes, this is generally very stable and predictable, which is what some people may want.  Might be preferred as well with someone that has little to no experience in knowing what a good project may look like too.

Jackson Babcock · Answer

I started by passively investing in single property syndications.  As Taylor mentioned I preferred to analyze each deal individually rather than being in a collective fund.  At the beginning of the year I decided to move over to being a sponsor and began a multifamily syndication company.  I have been an successful entrepreneur since college and after educating myself on multifamily and being involved in multiple syndications I knew this is where I wanted to concentrate my time and energy.  I enjoy helping people reach financial freedom through multifamily real estate.

Chris Levarek · Answer

@Steven Huynh We've used two funds now to allow investment into specific deals. The backend is a single fund however the deals are chosen by the investor and an investor portal tracks their investment choice, returns, etc.

Not only does this allow the investor to have to sign one PPM while being able to choose multiple investments throughout the year, it enables significant less overhead or complication on the operator side. Thus greatly improving the experience for both. Diversification, transparency and choice.

So it's probably a blend of the syndication and fund listed above because we do allow investment into a specific deal with a fund.

Steven Huynh · Answer

@Taylor L.

Thanks for your response.

Taylor L. · Answer

The logic would be because closed funds have the capital burning a hole in their pocket and need to get it working.

We don't list on crowdfunding sites because many of my investors are not accredited, and thus would not be able to participate. Part of the reason I'm in this business is to bring others along with me, so I don't want to leave folks out if I don't have to.

Steven Huynh · Answer

Thank you for your response, AJ. From what I understood of the previous text (feel free to clarify), funds typically show off their 'showcase' deals (the ones they've completed prior) to their investors. But the fund's future deals: may not always be as successful as their 'showcase' (a better word would be steller or best) deal(s).

Also, what are your thoughts on crowdfunding? Have you ever used them for any of your deals? Would you believe the costs justify the means? Why or why not?

@Chris Levarek

This seems brilliant, Chris, so why aren’t other sponsors doing this type of fund strategy? Is this strategy related to the 'rolling fund'? More details about that here: https://groundbreaker.co/rolling-fund/. (I'm not associated or affiliated with Groundbreaker or Hazic Services).

Also, what are your thoughts on crowdfunding? Have you ever used them for any of your deals? Would you believe the costs justify the means? Why or why not?@Jackson Babcock

Thank you for your response. Your strategy seems like a very intelligent way to get your foot into the door.@Jeffrey Donis

Thank you for your response. I actually know many operators who're nice enough for me to pick their brains ;). Let me known if you want any advice, and I could potentially point you to some successful ones. @William Costello

Thank you for your response.

Steven Huynh · Answer

Thanks for your response, Taylor. But could you give me insight into why closed-end funds are potentially pressured into doing bad deals? I work at a closed-end fund, I may ask my CEO's input on this.

Additionally, could you give me insight on why you would (or would not) list your deal(s) on a crowdfunding platform? The Crowdstreets, Fundrises, etc.