Real estate investment has been a great way to gain consistently. Among various other classes and types of real estate, multifamily units are preferred these days for several reasons. Investing in multifamily properties is one of the best options for commercial real estate investors. Why? Because they offer stable residential income, even during economic downturns.
What is a Multifamily Property?
As the name implies, and as discussed earlier, the multifamily property combines multiple units for residential purposes in a single building or a complex consisting of many buildings.
Technically, up to fourplex buildings are considered residential units, and beyond that, the buildings would be deemed to be ‘commercial.’ This is an essential consideration that investors should be aware of. This technical factor can impact the tax structure and many other aspects related to multifamily property investment.
Another important technical factor when investing in multifamily properties is whether the investor will permanently reside in the same building. This strategy could be useful to obtain a certain type of loan from banks and financial institutions.
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Why Is Multifamily Property Investment Profitable?
Multifamily investing is an ideal long-term investment method. Investors looking for a reliable source of consistent passive income should consider this option.
The property that investors purchase would be leased out to multiple families for residential use. If investors could choose the right multifamily property:
- In a prime location,
- With excellent economic growth prospects, and
- With a manageable set of residential units.
Then they could expect consistent rental income for years ahead.
The most crucial factor in multifamily property investment is property management. The investors can hire a professional agency to handle the day-to-day administration of the multifamily property.
It is vital to practically anticipate the upgrading and maintenance costs. Potential tenants look for a better location, proximity to business districts, and excellent amenities. These factors also affect the rents investors can earn.
However, if investors strike a balance between expenses and rental income, multifamily property investment bears fruits consistently for years to come.
Down the road, if the investors decide to liquidate the property by selling it, they can expect better returns due to the appreciation in value.
15 Great Ways of Multifamily Investing
Real estate investors should know various possibilities to be a part of lucrative investment opportunities. Do aspiring investors know about the various multifamily investment opportunities?
When most people think about multifamily investments, they think about buying a property with several renting units and renting them out right off the bat. That’s a great way to look at it. However, not everyone can handle the roles and responsibilities that come with being a landlord.
While this is one of the best ways to invest in multifamily property, it’s certainly not the only way to go. Besides buying rental units, an investor can also purchase shares in a real estate investment trust (REIT) or participate in multifamily crowdfunding.
Let us discuss the 15 ways to invest in multifamily property one by one:
Procuring a Multifamily Property
This is the simplest way to invest in multifamily property. Basically, you buy a duplex, triplex, or an even larger property and rent out the units to generate rental income. For financing purposes, up to four-unit properties are considered residential properties. If you own five or more residential units, it’s deemed to be commercial real estate.
Every good thing has its potential downsides. This option requires a very hands-on approach. You could hire a property manager to help you with some tasks, but your committed input is needed.
Also, rental income can be pretty inconsistent. Vacancies and maintenance costs are unpredictable and can considerably fluctuate your profits.
Multifamily property investment through direct procurement requires considerable investment capital. Every investor may not have paper currency in various easily dissolvable modes, such as in a safe deposit, a savings account, mutual funds, or publicly listed stocks.
So, the following few methods to invest in multifamily property would suit the investors willing to invest in his particular property class with a considerably low investment capacity.
Multifamily Real Estate Syndication
As an individual investor, you may not have the financial muscle and resources to invest in some deals. Some deals might need you to invite other investors, pool your resources together, and finance. This is what we call syndication.
Real estate syndications are an excellent option for the passive investor who doesn’t want to get involved with the day-to-day hassles of property management. Multifamily syndications are getting more popular. Syndications involve at least two parties, the first acting as syndicator or sponsor and the other as passive investors.
Primarily, a sponsor spots a sweet deal, finds investors to form a syndicate and oversees the transactions. Once the deal is closed, the sponsor is tasked with managing the investment. The passive investors finance most of the capital needed and get equity in the property in exchange.
As a sponsor, you’ll require a platform where you can manage all your investors and raise capital faster. This is where investment management software comes into play. Generally, most software is equipped with the right tools to process payments, get soft commitments, and identify serious investors.
Like any other form of investment, you ought to carry out your due diligence on the deal, as well as the general partner or company sponsoring the investment.
Investing in multifamily real estate syndications generates consistent returns for investors and is one of the safest investments in real estate. This is why it’s so popular.
Multifamily Investing Through Residential REITs
Real Estate Investment Trusts (REITs) are companies created to help investors put their money in real estate. Like many other stocks, REITs are publicly traded. This means that you can buy them through a broker with a simple click on your mouse.
REITs are some of the best-performing assets available. They provide investors with higher potential income, lower risks, and greater diversification. REITs need to distribute at least 90% of their income as dividends to shareholders. This means that shareholders get passive income.
They are an excellent option over other investment classes because they generate dividend income and dock capital appreciation.
Residential REITs own multifamily rental properties. There are several factors that you need to consider before investing in residential REITs.
For example, the best apartment markets are usually where home affordability is lower than in other markets. In the New York and Los Angeles markets, high demand means landlords can drive up rental income. Large residential REITs tend to focus on such bug markets.
Investors should also consider population and job growth in some markets. When jobs are readily available, and the economy grows in a specific market, people tend to flock to that city. Lowered vacancy rates and soaring rent rates mean that the demand is growing.
Residential REITs will continue to do well as long as apartment supply is low and demand is high.
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Multifamily Investing Through Smart Borrowing Options
The investors or a pool of investors can borrow investment capital for multifamily investing. We call them the ‘smart borrowing option’ as these ways are not practically similar to usual money lending techniques. Let us find out how investors can so that:
Home Equity Line of Credit (HELOC)
Practically, very few investors consider this option to invest in multifamily properties. However, if an investor could manage the assets and finances well, he/she can expect great returns. The limitation here is that the investor should own a property or have equity to start with.
HELOC allows investors to borrow against their current equity in a real estate property. It is similar to getting a mortgage against your existing property and reinvesting the capital in lucrative deals.
Investors can take up new projects, investments, consolidate their debt, and much more using HELOC. Of course, investing in multifamily properties could be a good option to continue to earn a share of profits from rental income.
In short, if an investor has a property, they can borrow against it to invest in a profitable multifamily real estate deal. The critical factor here is to anticipate the difference between the earning and repayment needs. This difference defines the investor’s overall profit.
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Did you know there are thousands, if not hundreds of thousands of people looking to invest in businesses? One way you, as a real estate investor can do, is consider crowdfunding debt to purchase real estate. To get started, loan originators (i.e. companies that offer debt crowdfunding) will list your opportunity. For example, you might be looking for $100k and offer to pay back 1.5x over 5-8 years, directly from revenue.
Debt investors love this type of investment product as it’s tied to a “bricks and mortar” business. And, there’s nothing more “bricks and mortar” than a multi-family building.
This method is ideal for employees because it involves their retirement funds. How about the early drawdown of retirement funds? This is again a rarely executed borrowing option among real estate investors.
The idea is that investors can borrow half of their balance in a retirement fund or $50,000, whichever is less. This facility is like a loan for 5 years. Technically, investors do not borrow from the company, but they would be utilizing their retirement funds early.
Investors can invest in multifamily property through a 401k loan (usually an employer-sponsored plan). As discussed earlier, this is a rarely used method for multifamily property investment.
In this way, the most crucial elements are the amount an investor can get through a 401K loan and the return on investment from a multifamily real estate deal. With proper planning, investors can retain their retirement funds while earning a margin throughout the investment lifecycle.
Loan Against Insurance
A loan against a whole life insurance policy, prevailing at least for five years, could be a wise way to tap a new asset. The technical limitation here is that the investor should have an ongoing whole life insurance coverage for over five years.
Investors can opt for a loan against their whole life insurance policy and invest in multifamily property. This investment method works in most cases, as the returns from a multifamily real estate deal would be better.
Though the investor’s whole life insurance policy keeps their successors financially secured, the asset remains unused for a long time. Investors can make the most of the acquisition by utilizing it for multifamily investing.
It is essential to anticipate interest to be paid against this loan and a consistent profit share in a multifamily real estate investment deal.
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Reinvest as Multifamily Property Investment
Reinvesting the capital and gains from selling an investment property into a multifamily property is also a sensible investment method. The most crucial gain investors get here is the consistency of returns. Let us find out how this works:
Under Section 1031, the Internal Revenue Code allows investors and business entities to differ federal taxes to exchange investment property. To make it simple, an investor can sell the existing similar property and reinvest the capital and gains to purchase a multifamily unit.
In doing so, the investors may be the sole owners of the multifamily unit or perhaps part of a pool of investors purchasing and managing a multifamily property.
This is an investment method that is overlooked by most investors. The consistent profits as part of the syndication of multifamily properties and the tax benefits when reinvested within a year are some phenomenal profits an investor can make.
Such a Like-Kind Exchange could be a sensible way to shift from being an active owner of a small property to a passive investor in a pool of investors. After a multifamily investment through a trust or syndication, investors do not have to look after the daily hustle and bustle of managing the property.
Invest in Underperforming Multifamily Units
Investors may wonder how low-performing assets may be profitable. Let us try to analyze the game briefly:
Acquire Low-Performing Cash Flow Homes
It may be advisable to look for low-performing investment properties in high valuation markets. The most crucial element investors must consider in order to succeed in this game is their holding capability.
Usually, property owners in high valuation markets try to liquidate their investments based on the ups and downs of appreciation. If an investor or a pool of investors acquire such low-performing multifamily property, it could be beneficial in the long run.
Such deals may be profitable if investors manage things with a multidimensional approach. Low-performing assets may be beneficial if investors are driving them for a living. Because investors need to make up their holding costs and earn a low margin through net rental income.
The actual lump sum gain would come at the time of reselling such multifamily property. The investors need to follow the market trends to sell the property at the right time, at a better price.
There are scenarios where like-minded professionals can have a flexible team up based on contributions for benefits shortly. Let us glance at this unique and creative way to invest in multifamily properties:
Custom-Defined Pool of Investors
Forming a usual 401K custodial company may attract many restrictions regarding the contributions of the members. It also provides some limited benefits to its employees and stakeholders. The particular case, though, is forming a company with custom-defined terms for contributions and benefits.
This incredibly profitable method is gaining popularity among small groups of professionals such as doctors and attorneys from across the country. They team up to form an organization, contribute consistently, and utilize the benefits to invest in multifamily property.
The process is not as simple as it seems, though. Investors need legal and financial expertise or work with experts to execute this investment method swiftly.
Invest in Multifamily Properties Using Individual Retirement Accounts
The employee class usually accumulates the contributions added with almost equal amounts from their employers into IRA Services and Provident Trusts. These are the genuine institutions offering some withdrawals and borrowing facilities that investors can utilize for multifamily property investment.
The following are some significant withdrawal options:
The investor community should realize the difference between a regular and a self-directed individual retirement account. Technically, a trust or custodian administers such accounts. However, the account holders can manage these accounts individually.
In an ordinary IRA account, holding various alternative investments is not allowed. However, investors can invest in multifamily property withdrawing from a self-directed IRA.
Thus, investors can utilize their retirement fund early for consistent gains and eventually retain the retirement fund through regular reinvestments. This investment method could be a better alternative that allows investors to spend their retirement with dignity by investing handsome profits in multifamily properties.
Simplified Employee Pension is another powerful method designed specifically for small businesses to contribute to their employees and their own retirement funds. This type of account has a similar kind of functioning but better and greater benefits.
Investors can withdraw from this account to procure a real estate property. The best option would be multifamily investing. Practically, an investor can gain consistently throughout the investment lifecycle. So, investors can earn a profit share even after their retirement.
Employees of small businesses and entrepreneurs running smaller ventures (with limited employees) can execute this investment method for lucrative and consistent gains in the long run.
Self-Directed Individual 401K
Individual 401K accounts are governed by IRA for self-employed sole proprietors, corporations, and Limited Liability Companies. Though the ultimate goal is to accumulate retirement funds, here, in this case, the self-employed individuals contribute to this account both as an employee and an employer.
The functioning of such an account leads to higher contribution limits. Thus, the overall fund accumulation by the end of the self-employed sole proprietor’s service would be much higher as compared to usual employees.
Ultimately, the sole proprietor can withdraw from such accounts to invest in multifamily property. This investment method encourages entrepreneurs to invest in the real estate market for an additional source of passive income along with their core business.
401K to Self-Directed Rollover IRA
This method for multifamily property investment is a bit tricky but practically implementable for investors. The investors need to roll over the funds in their old employee-sponsored 401K account to a self-directed IRA.
Usually, such transactions may occur when a person changes a job or gets retired. The trick here is to get the funds from a 401K account to a self-directed IRA, as it allows investors to invest in multifamily property.
Investors need to think innovatively to grab profitable investment opportunities while adhering to the set norms of regulatory authorities. Such an investment method brings a chance to leverage an untapped resource to generate consistent returns.
Keogh to Self-Directed Rollover IRA
It is important to note that Keogh is a complex, qualified tax-deferred retirement plan targeted to the self-employed community. Technically, Keogh attracts higher administrative charges than a usual Individual Retirement Account.
The self-employed entrepreneur can transfer the funds in cases like retirement, incorporation, or sale-out of their business.
It can be beneficial to convert a Keogh account into a self-directed account. A self-directed IRA is economical to maintain and offers flexibility as the self-employed individual can choose multifamily investing for an additional source of passive income.
The aspiring investors having a Keogh account can convert it to a self-directed IRA account and start investing in multifamily real estate deals.
Self-Directed Roth IRA
Investors need to understand that a self-directed Roth IRA is slightly different from other retirement plans. Investors put tax-paid money into this account. The good news is that all the gains and withdrawals in the future would be totally tax-free!
This way, investors pay their taxes upfront in the beginning and can enjoy tax-free equity growth later throughout their lives. Self-Directed Roth IRA could be a valuable investment vehicle for multifamily investing.
In the last segment, investors would know some tactful methods to invest in multifamily property by pre-utilizing their retirement funds. As multifamily investing involves the most minor risks even during economic downfalls, investors can plan out their calculated risks and make the most of their otherwise unused assets.
An investor does not need to own a multifamily property single-handedly. The practical ways to acquire multifamily properties need to develop a pool of investors. Like-minded investors can come together to raise capital and invest in multifamily property.
The article introduces multifamily property investment, talks about its profitability, and 15 ways to invest in multifamily real estate investment deals. And, I hope the discussion opens up new possibilities for investors. To be sure, multifamily property investors who follow the methods discussed in this article can make incredible profits to achieve their financial goals.