I’m a huge fan of investing in multifamily, and I also like to be transparent with my investors. In this post, I'll explain why investing in multifamily real estate may not be for everyone. Here are some key areas to think about.
Minimum Investment Amounts
Most syndicators will require a minimum investment amount to participate in the opportunity. Often, we will require a $50k to $100k minimum investment. This means that most investors will need to have that amount of cash readily available to deploy when an opportunity arises.
Cash Illiquidity for 2-5 Years
A 2-5 year business plan is fairly standard in most multifamily syndications. The plan is then executed, and decisions are made by the General Partners. An exit event can only occur when the General Partners all agree to sell. Until then, an investor’s cash is tied to the investment, so an investor should expect their investment amount to not be available for 2 to 5 years.
Investors Must Qualify to Participate
Most multifamily investment opportunities are offered under rules 506(b) or 506(c). These are SEC rules under Regulation D of the "Securities Act” that syndicators raising capital must follow.
On a high level, a 506(b) offering is one that requires all investors to be either “Sophisticated” or “Accredited” and who MUST have a prior relationship with the sponsor. Whereas a 506(c) offering requires all investors to be “Accredited”. There is a lot more detail that goes into this, and I’ll go into the details, especially on what an “accredited” and “sophisticated” investor is, in next week’s blog.
Cash Distributions Take 6 Months to Kick In
Because the first 6 months of the business plan is heavily focused on renovations and other improvements, the net income received from the property is not positive. Once the syndication team finishes the initial heavy lifting and raises rents, net income swings more favorably, and cash distributions are available to their investors at that time.
Investments are Passive
When investing with multifamily syndications, be mindful that a team of experts has already put together the business plan and will execute it. The investors should expect to receive regular updates on the progress of the business plan and remain informed. We issue out monthly update newsletters and have quarterly zoom calls. Investors won’t need to do any active work such as maintain the property, hire a property manager, make day to day decisions, etc. Most investors that I speak to love the hands-off nature of passive investing. However, some people want to be more involved and have more control and as a result, they choose not to invest.
Less Time to Act Due to High Demand
We’ve seen a very high demand for our offerings with most fully committed and funded within a few hours. Often, we are mostly funded through soft commits before we launch our official webinar for the offering. Soft commits are given top priority to invest. Once we are fully committed, investors will be put on a waiting list in case some investors are not able to fulfill their commitments. We have had a waiting list for every one of our offerings, and we expect this pattern to continue. In order to receive information about our upcoming offerings and to have the opportunity to make a soft commit, be sure to sign up for our investor’s club.
Not All Syndications Are Alike
When we first invested in multifamily, we did it as a learning experience and first became passive investors. I met syndicators through meetups and webinars, and there were some that we thought we could trust. In most cases, our investments went well, but in one case it did not. The one that didn’t go well was with a well-known syndicator in the Bay Area that uses an exhaustive amount of data to support his investments. His plan showed great returns, but in the end, we only saw about 6% total come back. Thankfully, we didn’t lose money on the investment, but it wasn’t as good as we thought it would be. We didn’t get cash distributions for an entire year and a half. This is why I spend a lot of time being conservative in my business plan and I try to pull various levers in order to provide my investors with their expected distributions and returns.
Tax Returns Take Longer and Get More Complex
There are some great tax benefits to receive when investing in multifamily, and the person putting together your tax return will need to understand how to unlock those benefits. Syndicators provide a Schedule K-1 document to report the property’s income, losses, and distributions to each investor. This document is usually available in late March to April timeframe which bumps up close to tax filing time. As a result, we highly recommend for multifamily investors to file tax extensions.
Multifamily investing isn’t for everyone and that's okay. You need to determine what is best for you and your needs. If you have questions on whether it's the right fit for you or not, feel free to schedule a call with me!