How Passive Do You Want to Be? Two Scenarios for Multifamily Investing

When I first started investing in multifamily real estate, I was a completely passive investor. After several investments, learning and gaining experience, I became more and more active in my investments.

One of the great things about real estate investing overall, and particularly multifamily real estate, is that we can be as passive or active as we choose. It just requires knowing the various approaches to investing and choosing the one that best fits our goals.

Here are two scenarios to help decide how passive or active you want to be when investing in multifamily real estate.

Scenario #1: Not Passive at All

If you want to be very active and hands-on in your multifamily real estate experience, then you’re going to be directly purchasing and managing properties.

This includes researching and knowing the market and submarkets, finding investment opportunities, building a team to execute deals, underwriting and qualifying deals, making offers, negotiating purchases, due diligence, securing debt financing, property and asset management, and overall operating the business plan.

It could also potentially include raising capital from other investors and ongoing investor relations.

Additionally, there can be more responsibilities depending on the type of strategy you deploy and class of property purchased. For example, if you’re deploying a value-add strategy with a Class C property, then you’ll have the task of overseeing renovations and repositioning of the asset.

The bottom line is that in this scenario, you are actively managing the entire acquisition and investment project from start to finish.

Regarding returns, this is where you can potentially make a very high return on your investment. As the owner and operator of the asset, you are in position to execute plans that can boost revenue, reduce expenses, and grow the asset’s value. However, this can also be the highest risk scenario, therefore carrying the greatest risk of potential loss.

Actively owning and operating multifamily investment property is practically the pinnacle of active rental real estate investing. There is not much passive about this scenario. And while you should definitely build a team to help accomplish these tasks and outsource specific parts of the overall job, you are still the owner in charge and actively playing a role in managing the investment.

Scenario #2: Completely Passive

On the opposite end of the spectrum, maybe you want to invest in multifamily real estate, but have no desire to be involved in the process of finding, evaluating, purchasing, or managing the property. In this case, you can go the route of being a passive investor in multifamily syndications.

A multifamily, or apartment, syndication is when money is pooled together from multiple investors and used to purchase the property and deploy the investment strategy.

As a passive investor, you are not purchasing the entire property yourself. Rather, your investment goes toward securing a portion of the equity in the property, along with other investors.

All the acquisition and management responsibilities are performed by the Sponsor, or Operator. They are the owner and manager of the investment (i.e., the team doing all the active things in Scenario #1).

You are not underwriting, managing appraisals, negotiating purchase agreements, attending closings, or any of the items that go into purchasing and closing on the property. Nor are you involved in qualifying or securing the debt, or any part of the loan process.

Additionally, you have zero involvement in the management and operation of the apartment. No one will call you to discuss building repairs, renovations, tenant turnover, or the like.

Once you’ve agreed to invest in a deal, then your only responsibility is to contribute your capital toward funding the equity being invested.

As a passive investor, while your return on investment is not likely to be as high as the active investor who primarily owns and operates the property, your risk is also considerably lower, as it is generally limited to the amount of capital you invest.

For these reasons, apartment syndications are often an attractive option for busy professionals and others who want to invest in real estate, but simply do not have the time or even interest to make the efforts required in directly purchasing and operating multifamily property.

Conclusion

So how active or passive do you want to be as a multifamily investor? Knowing your goals and knowing the responsibilities involved in various approaches to multifamily investments can help you make this decision.