Multifamily investing explained!!

My real estate journey in Multifamily investing started about a year ago. I started attending meetups, talking to other investors, researching and analyzing for close to 8 months before investing passively and also actively (i.e, becoming a general partner). Several of my friends and acquaintances have asked me about the multifamily investing process, life cycle and difference between a general partner and limited partner. Hence decided to blog it to explain it in as simple a way as possible.

There are many ways to invest in real estate like single-family, small multifamily (2-5 units), multifamily (>5 units), land, mobile homes, storage, commercial (office, retail, etc) and more. For me, multi-family, i.e, Apartments investing, made most sense to me as this something I could invest passively or invest and manage actively. In a recent research article, CBRE shares that Multifamily is most resilient than office, industrial or retail. (https://tinyurl.com/y3h3t5tr). 

Multifamily offers multiple benefits such as 

• - Diversification
• - Capital preservation
• - Equity growth
• - Cash flow
• - Tax depreciation

A group of like minded investors with experience and/or knowledge in multi-family real estate join together to form known as General partners (GPs). They are also called as active partners, Sponsors or syndicating team, or managers. They are responsible for acquisition, financing, equity raise, management and eventually exit the property through the sale.

• - They research to identify right metros and neighborhoods and then work with brokers to identify suitable and value add properties.
• - They also identify financing (agency loan or private bank loan) and raise equity for down payment, which is typically 25% to 35% from family, friends, established contacts (called as investors, Limited partners or passive partners).
• - GP partners hire a property management company to manage day to day operations of the property.
• - They work through a Property Management company on value-added renovations and improvements on both exterior and interior.
• - Increase the Net Operating Income (NOI) through increasing rent and lowering expenses. NOI and Cap Rate determine the property value. https://www.thebalancesmb.com/...
  
• - Communicate (and distribute cash returns) to investors periodically. 
• - Exit at the end of the planned timeline, typically in 3 to 5 yrs.

The property ownership is split into two pools. One would be the general partner pool, typically around 20% to 30%. This is called sweat equity for doing all the leg work from acquisition to sale. The rest 70% to 80% is called the “Investors pool” and each investor would get equity proportional to their investment $$. The limited partners are not involved in day to day operations but talk to GPs as needed and receive regular updates on the property status and returns. Note, that if GPs invest their $$ (which is not required though) and get equity from the investors pool, proportional to their investment.

So the big question is what would be the returns for investors? While every investment has risks whether it is stocks or real investment, multi-family is considered to be safer and have optimal returns. Every state, city or neighborhood are different when it comes to risk and possible returns. You need to identify asset class that you fully understand and can make an informed decision. Like any real estate investment, multifamily investment has its own risks and should be carefully examined and you should be comfortable with the risk. 

Please message me directly for any questions or want to share your feedback on my blog.