By: James Eng, Senior Director Old Capital
After deciding that you want to become a multifamily investor, the next decision you have to make is how you are going to actually invest in multifamily properties. The 3 most common ways of investing are: Independent rental owner, lead partner/general partner, or limited partner. Each of these ways of investing has its advantages and disadvantages. Depending on your current personal balance sheet and current job, will determine which of these ways will be the most beneficial for you.
Independent rental owner: Individual with strong balance sheet looking to own their own properties without partners
- Ability to control investment and make decisions based on your personal situation
- No general partners or limited partners to answer to
- Ability to roll capital gains from one investment to the next utilizing a 1031 exchange
- Depending on amount of capital, might not be able to acquire enough units to leverage full economies of scale
- Must sign as guarantor on loan
- Must find, negotiate, close, and manage the property
- Concentrated risk in a small number of properties
- Must spend time learning to be asset manager/property manager
Example: Doctor purchases 25 unit property for $1MM. He invests $250K as a down payment and takes out a recourse bank loan for $750K. He must personally sign recourse for the loan. Due to the small number of units, he either self manages the property or pays a high management fee of 7%-10% of income.
Lead Investor/General Partner: Individual who puts deals together by leveraging other people’s money and 3rd party property management to buy larger multifamily properties
- Earn acquisition fees, sponsorship equity, and/or larger return compared to cash invested in deal
- Control over property investment decisions
- Ability to leverage other people’s money to buy larger apartment properties
- No limit to the size of properties you can buy
- Leverage 3rd party property management
- Must sign on loan as guarantor
- Must spend the time to find the deal, negotiate the deal, raise the equity, and be asset manager of the property
Example: Lead investor acquires a 100 unit multifamily property for $5MM. Lead investor signs a non-recourse note for $4MM and raises the down payment of $1MM from limited partners. Lead investor might earn a 1% acquisition fee and/or 10% sponsorship equity for putting the deal together.
Limited Partners: Individual looking for truly passive income at a slightly lower return with diversification across multiple properties, general partners and markets
- Do not have to sign as guarantor on loan
- Do not have to find, negotiate, close transactions
- No day to day responsibilities of managing the property
- Receive monthly or quarterly distributions of cash flow with limited investment of time after initial due diligence at acquisition
- Receive same tax benefits in terms of depreciation as independent rental owner and lead investors
- Ability to receive benefits of economies of scale of larger properties
- Ability to invest across thousands of units with multiple general partners in multiple submarkets for diversification of risk
- Must spend time identifying and meeting lead investors
- No management control of property. Must rely on general partner to make day to day decisions
- Limited liquidity as general partner will make decisions about when to sell or refinance the property
- Lower return due to payment of sponsorship fee and/or sponsorship equity for general partner putting deal together
- Difficult to utilize 1031 tax deferred exchange as all members of the LLC must go to next transaction
Example: Retired corporate executive has $1MM to invest in real estate. He invests $50K across 20 separate deals with 5 general partners in 4 different markets: Dallas, Houston, Austin and San Antonio.
No matter which way you decide to invest in multifamily, Old Capital can assist you in getting started in all 3 ways. Feel free to reach me via phone or e-mail at my contact information below.
7460 Warren Parkway, Suite 100
Frisco, TX 75034