Apartment and multifamily investing is not a get rich quick scheme, like all worthwhile endeavors, it takes hard work and can be very challenging, especially as an active investor.
That having been said, investing in apartment property has produced more than its share of millionaires over the years, so the financial rewards are potentially very great.
Investing in Apartment Buildings – Is It for You?
The following article will give a general overview of the subject and you will come away with a better idea of what is involved and you will be better equipped to make that decision.
First, you need to consider what type of investor you will be at the outset, an active or a passive investor.
Active Apartment Investing & Passive Apartment Investing
Active Apartment Investing
Active apartment investors are ultimately responsible for the purchase and management of properties for rental income. There may also be some renovation involved to add value to the investment property; this also needs to be overseen.
If you decide to be an active investor, you choose to be ultimately responsible for every part of the deal, even if you choose to delegate the individual elements to other professionals.
As an active investor acting independently, you are more at risk financially because the funding is all done in your name. But the profits are potentially much greater because you own the deal.
Passive Apartment Investing
Passive real estate investments allow you to invest in real estate without the leg work and responsibility. Depending on the level of your financial commitment the returns will be lower.
Passive real estate returns are lower, generally under 10%.
You simply invest your capital, read the regular project updates and receive your quarterly dividend checks.
The difficult part is to decide which рrivаtе invеѕtmеnt fund or mаnаgеd joint venture to invest in and to do your due diligence before committing your capital to a ѕуndiсаtоr.
Apartment Investment Education
Many that are expert apartment investors today, started out with passive investing. This gave them an introduction to the real world of investing and enabled them to build on their education in the world of multifamily investing before taking on active investing.
As a passive investor, you can legitimately ask questions of the sponsor. Depending on the amount of money you invest, the sponsor will be willing to spend some time educating you about the deal.
You can ask to see the deed, the market research, the underwriting, the appraisals, inspections, and property financials, and ask questions about each aspect of the deal.
Ideally, you will be furthering your education and getting a good return on your investment at the same time,
Education Leads to Confidence
Because with apartment investing you will be dealing with big numbers you will likely need help to fund your deals.
By the time you are ready to approach other investors to help finance one of your own deals, you will need to have supreme confidence in that deal and be able to persuade others as to why it will yield great returns.
Of course, you must know how to underwrite a potential property so that you will understand the details that you need to make a wise investment.
There are many courses available online to learn this skill but you also need to learn from the mistakes of others.
Resources like meet-ups and podcasts are great because you can learn from other investors and the mistakes they made.
Positives & Negatives
To help you decide if apartment investing is really for you, let’s break it down into a list of positives and negatives.
Leverage is the use of other people’s money (OPM) to finance commercial real estate investments. This means that you can get into the market with relatively little of your own capital.
Good Historical Returns
Historically, U.S. investors have received an average 8-10% annual return on property investments.
Long Term Appreciation
Real estate investments tend to increase in value over time, putting money in your pocket in the future.
Multifamily investments generate income and can do it over long periods.
The three D’s, deductibility, depreciation, and deferability. You can deduct normal expenses, depreciate your investments, and defer taxes through the Tax-Deferred 1031 Exchange.
With wise investments, your equity will grow over time in addition to your cash flow.
The Numbers Are Higher
Because you are dealing with millions of dollars you must pay careful attention to the numbers in each deal and make sure that your investments are sound.
Not a Level Playing Field
When you are a canoe amongst battleships it can be dangerous to make waves. The wise course is to find a mentor who can help you at first.
Even if the money is not yours, the money has to be found and this is one of the biggest challenges. Capital-raising is a task that should not be underestimated.
Ties up Capital
You or your investors have to be willing to carry the costs of such investments over a long period of time. Generally speaking, these are longer-term investments.
In the event of a recession, your investments may produce little return for a time so you need to stress test you proposed deals and have reserves of capital to help you through the downturn.
So what have we learned from this article?
First, you need to decide if you are interested in passive or active investing, either way, you may wish to begin with passive investing to enhance your investor education.
Second, we’ve talked about the importance of education. This is necessary, both in choosing the right deals and projects to invest in and in being able to talk in an educated way about those deals to prospective investors.
And finally, we’ve looked at the positives and negatives of apartment investing.
We trust this information will be of help in your deciding if getting into apartment investing is the right move for you.