Before digging too deep into this topic, I want to note that it doesn’t require $100,000 to invest in multifamily real estate. The minimum investment amount on each deal depends on the syndicator—I’ve seen it be as low as $10,000.
You can also invest in multifamily using a combination of your available cash and your IRA savings, so the morale is you don’t need to be wealthy to invest in commercial real estate.
Why Invest in Multifamily?
Since 1950, the percentage of the world’s population who are city dwellers has been increasing constantly, and it’s projected to continue (see below).
As more people move into cities, housing becomes less affordable, which forces people to rent longer. As a result, the percentage of rental households increased across all age groups between 2006 and 2016 (shown below).
Hopefully these statistics are enough to get you more interested in multifamily. Now let’s say you have $100K to invest. In the following sections, I’ll discuss the wisest ways to get started in multifamily as a limited partner (LP).
What’s Your Investment Preference?
Before jumping into investment strategies, it’s important to first understand your own preferences. Consider things like:
How much risk are you willing to take?
How long do you feel comfortable holding the investment property?
What’s your minimum annual return requirement?
Do you prefer investments with stable cash flow throughout the years? Or something with little cash flow but a large payout after disposition/refinance?
Multifamily Investment Strategies
1. Buy and Hold
This strategy involves buying and holding a stabilized multifamily property that requires little to no renovation.
Characteristics:
Lower risk
Cash flows starting on day one
Minor or no renovation
Lower expected return: ~10% IRR for LP
Investment period: 7 to 10 years (typically)
2. Value Add
This strategy involves buying the worst property in the best neighborhood, then increasing net operating income (NOI) and value of the property through renovation.
Characteristics:
Moderate risk
Can cash flow starting on day one
Moderate to heavy renovation
Medium expected return: ~15% IRR for LP
Investment period: 5 years (typically)
3. Ground-Up Development
This strategy involves designing and entitling a project, then constructing it from the ground up.
Characteristics:
Higher risk
No cash flow until stabilization
Ground-up construction
Higher expected return: (20% IRR or higher for LP)
Investment period: 2 years or more on design and entitlement, followed by 2 to 3 years of construction, and then another 2 to 3 years of stabilization (typically a minimum of 6 years)
The three options are all unique in their own ways. There are no right or wrong choices—it just depends on your investment preference.
How to Invest in Multifamily Wisely as an LP
1. Choose a Desired Market
Start by listing a dozen markets that you are interested in. Next, research each to narrow the list down to three or four markets. Look for characteristics such as population growth, income growth, crime decline, and job growth.
City-Data and the Census Bureau have great websites for finding data.
2. Meeting the Syndicators
Once you’ve narrowed down your list to a few desired markets, it’s time to look for the right syndicators. Start by going to local real estate meetups. You can find local meetings on BiggerPockets or Meetup.com.
Some meetups are full of sales pitches, so it may take a while before you find a good one. If there are no good real estate meetups in your area, then consider starting your own! It may sound daunting, but if you continue to provide value in all your meetings, then people will keep coming.
3. Choosing the Right Syndicators
Find someone whose business strategy aligns with yours. If you are looking for a lower-risk investment like apartment buy and hold, then look for syndicators in that field.
Track record is important. Before committing your money to the project, make sure that the syndicator or someone else on the team has experience with this type of project or projects of this size before. It’s also very important that the syndicator has a successful history in this local market.
Besides all the technical, make sure that the person is likable and someone with whom you enjoy working. If something doesn’t smell right, then stay away.
4. Evaluate the Deal
I highly recommend evaluating the deal yourself before committing your money.
Typically, syndicators will put your email address on their distribution lists, so that they can contact you when there’s a deal coming up. If this syndicator is very organized, then an investment summary will be included in the email regarding the upcoming project.
The investment summary will include various things, such as the project information, rent roll, pictures, business plan, pro forma, the expected return, and more.
The business plan tells you what they plan on doing with the property. If it’s a value-add scenario, then it will list the things that the team plans on renovating.
Based on this business plan, you can evaluate the pro forma and the expected return. Compare it to what they have. Hopefully yours is equal or better than theirs.
5. Committing the Deal
Each deal has its own minimum investment amount, which depends on the syndicator. The minimum is generally around $30,000.
If you are investing $100,000, then you should have enough for three deals. I encourage you to choose different markets for all three deals to diversify your portfolio and minimize risk.
What’s your preferred multifamily investment type? Why is that the case?
Please tell me in a comment below.