Ways to invest in MF Real Estate
There are three ways to directly invest in multi-family real estate. The first way is to be an independent owner. The second way is to be a lead investor or a sponsor by syndication. The third way is to be a limited partner or a passive investor.
The advantages of being an independent owner with no partner are: total control and the ability to use a 1031 exchange. As the sole owner of the property, you have total control of your investment, with no need to consult with partners. When you sell the property, a 1031 exchange can be used to roll capital gains from one investment to the next.
But the disadvantages are many. You are limited by your capital and you may not be able to leverage full economies of scale because you can’t afford to acquire enough property. You also have all the responsibility for locating the property, researching, negotiating, and signing to be the loan guarantor. In addition, you must also be the asset manager/property manager. In essence, you just brought a business and you have to operate it.
With the third option, being the lead investor or general partner, the advantage is you can leverage other investors’ money to buy larger apartment properties and have control over investment decisions. In addition, you can also earn acquisition fees, sponsorship equity, and/or a larger return compared to your cash position in the deal.
The disadvantage as the lead investor is you must have enough net worth or liquidity to be a guarantor of the loan, and you have to invest your time to find the deal, negotiate, raise equity, and be the asset manager.
Most investors choose the third option -- to be a limited partner and invest passively. This is true for most high-income earners who have a diversified portfolio, but not the time or desire to purchase and operate the real estate. The advantage of being a limited partner or passive investor is that you are involved in selecting, acquiring, and operating the property by selecting a sponsor. A passive investor can still take advantage of the same depreciation tax benefits as independent rental owners or lead investors. Another advantage is that they can invest across thousands of units with multiple general partners in multiple submarkets, for diversification of risk.
The disadvantages are that you must spend time identifying and meeting lead investors and have no management control of the property. Also, with so many other passive investors in the partnership, a 1031 exchange to save tax dollars is much more difficult to execute. Also, to invest in multi-family passively it is important to pick the right sponsor.
The advantages of being an independent owner with no partner are: total control and the ability to use a 1031 exchange. As the sole owner of the property, you have total control of your investment, with no need to consult with partners. When you sell the property, a 1031 exchange can be used to roll capital gains from one investment to the next.
But the disadvantages are many. You are limited by your capital and you may not be able to leverage full economies of scale because you can’t afford to acquire enough property. You also have all the responsibility for locating the property, researching, negotiating, and signing to be the loan guarantor. In addition, you must also be the asset manager/property manager. In essence, you just brought a business and you have to operate it.
With the third option, being the lead investor or general partner, the advantage is you can leverage other investors’ money to buy larger apartment properties and have control over investment decisions. In addition, you can also earn acquisition fees, sponsorship equity, and/or a larger return compared to your cash position in the deal.
The disadvantage as the lead investor is you must have enough net worth or liquidity to be a guarantor of the loan, and you have to invest your time to find the deal, negotiate, raise equity, and be the asset manager.
Most investors choose the third option -- to be a limited partner and invest passively. This is true for most high-income earners who have a diversified portfolio, but not the time or desire to purchase and operate the real estate. The advantage of being a limited partner or passive investor is that you are involved in selecting, acquiring, and operating the property by selecting a sponsor. A passive investor can still take advantage of the same depreciation tax benefits as independent rental owners or lead investors. Another advantage is that they can invest across thousands of units with multiple general partners in multiple submarkets, for diversification of risk.
The disadvantages are that you must spend time identifying and meeting lead investors and have no management control of the property. Also, with so many other passive investors in the partnership, a 1031 exchange to save tax dollars is much more difficult to execute. Also, to invest in multi-family passively it is important to pick the right sponsor.