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 invested in couple of properties, one in Kansas City suburbs, MO and other one property in Tucson, AZ.
Several of my friends and acquaintances have asked me about the multi-family investing process, life cycle and difference between general partner and limited partner. Hence decided to blog it to explain it in as simple 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 sense to me as this something I could invest or invest and manage. In a recent research article, CBRE shares that Multifamily is most resilient than office, industrial or retail (https://tinyurl.com/y3h3t5tr).
A group of like minded investors with experience and/or deep knowledge in multi-family investing 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, manage and eventually exist the property through the sale.
- They research to identify right metros and neighbourhoods 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, known contacts (called as investors, Limited partners or passive partners).
- GP partners hire property management company to manage day to day operations of the property.
- They work through various contractors on value-added renovations and improvements both exterior and interior.
- At the end of 3 to 5 yrs, look for buyers to sell the property for a nice profit.
The property ownership is split into two pools. One would be general partner pool , typically around 10% to 30%. This is called sweat equity for doing all the leg work from acquisition to sale.
The rest 70% to 90% is called “Investors pool” and each investor would get equity proportional to their investment $$. The limited partners are are not involved in day to day operations but talk to GPs as needed and receive regular updates on the property status and returns.
Note, that if GPs invest their $$ (which is not required though), they also 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 better returns. Most syndicators offer Cash on Cash returns between 8% to 12% and investment is typically doubled in around 5 yrs.
You need to identify the one that you understand and can make a informed decision. Like any real investment, Multi-family investment has risk and should be carefully examined. You should be comfortable with the risk. Every property, or neighborhood or Metro are different when it comes to investing risk and possible returns.
Please message me directly for any questions or want to share your feedback on my blog.