First, let’s discuss what multifamily real estate is. Then move into how to invest in multifamily real estate. Finally, we will close on the requirements for investing in multifamily real estate. Let’s begin with the what.
What is multifamily real estate?
Multifamily real estate is a residential property that contains more than one unit. These include duplexes, triplexes, quadplexes, townhomes, apartment complexes, and semi-detached homes. There is a breakpoint where the real changes from residential to commercial. Four units and below are residential. Five units and above are commercial. This designation is important, as brokers and lenders use different approaches to value Residential and commercial properties. Now we have an inkling of what multifamily real estate is, let’s move on to understanding how to invest.
How to invest in multifamily real estate?
There are many ways to invest in a multifamily property. These are just a few.
Individually
For smaller property sizes or individuals with a large capital pool, purchasing a property yourself is an option. Purchasing a multifamily property this way works the same as buying a single-family home. You either pay for the whole property upfront or obtain a mortgage to cover some of the purchase price.
Joint Venture
A second way is through joint ventures. A joint venture is a commercial enterprise undertaken jointly by two or more parties who, otherwise, retain their distinct identities. The members pool their money and can either purchase the property outright or get a mortgage to assist in the purchase.
Syndication
The third way is through syndications. Syndications are where a small team of individuals finds, analyzes, and promotes the property to qualified investors. This group is often referred to as general partners or GPs.
The GPs promote the deal to potential passive investors. Passive investors only need to invest their money into the deal while the GPs do all the work managing the property.
Due to this, LPs will receive lower returns than the general partners. No single article will tell you everything you need to know about investing. Check our thoughts on Questions Passive Investors should ask.
What are the requirements for investing in multifamily real estate?
Like with most activities, there are requirements you need to account for when beginning.
Individually
Buying a residential property requires either cash or a residential mortgage. Mortgage companies look at your income, the type of property you are purchasing, your assets, your credit score, and the debt-to-income ratio. They need this information to see if you can pay the mortgage payments, and how likely you are to pay.
Commercial Joint Venture
A joint venture has similar mortgage requirements to investing individually but introduces a joint venture agreement between the members. These agreements define what members will put into the deal,the end goal, and more.
These agreements generally contain:
- Each business’s information
- Member’s names and addresses
- Joint venture type
- The purpose of the venture
- The duties and obligations of each member
- Voting and meeting requirements
- Ownership assignment percentages
- IP rights
- Profit and loss allocations
- Terms for dissolution of the venture
- Noncompete and confidential agreements
- Each member’s signatures
Syndication
The requirements for syndication, however, vary depending on if you are part of the GP team or a passive investor. For a GP team member, there are no real restrictions. All you need is to know how multifamily investing works and know people who want to invest in the deal.
Becoming a passive investor, however, is a bit more complicated. In general, you need to be an accredited investor. An accredited investor: (see Full SEC definition here)
- has $1 million in net worth (excluding your primary residence) OR
- make $200,000 a year if single or $300,000 a year if married
There are some exemptions to these rules, however. 506b syndications allow you to join as a sophisticated investor. Being a sophisticated investor means you have a deep knowledge of real estate investing and how it works. 506c syndications do not allow sophisticated investors. Therefore they can only accept accredited investors.
Finally, all passive investors must have a significant working relationship with at least one GP member.
No matter how you choose to invest in real estate, you must educate yourself. Accordingly one should reach out to a coach or mentor or at least self-educate using books, blogs, podcasts, etc.