Increasing numbers of consumers are realizing today that multifamily real estate investing can be a reliable, steady and profitable type of investing. The current demand for affordable housing in urban hubs and outlying areas is constantly growing. In cities and suburbs alike, the need for attractive, safe and reasonably priced apartment rentals is rising.
Apartment living is now preferred by many diverse groups of people. From students and newly employed singles to young professional couples and families of varied sizes, many people are seeking apartments. This makes investing in large apartment buildings and complexes significantly less risky than putting capital into other investment asset classes.
Why Investing in Large Apartment Properties is Savvy and Smart
You should make the savvy and wise decision to invest in large apartment buildings today for the following reasons:
Impressive and Stable Cash Flow
Apartment investment cash flow is the remaining accrued rental income after subtracting all related expenses. These expenses may include mortgage payments, maintenance costs and other fees. Since average apartment leases are for one year, apartment investors benefit from the resulting lucrative and reliable cash flow.
This cash flow plus dividends on the investment provide funds for making additional investments and building a strong property portfolio. It also leads to gaining greater wealth and success as a real estate investor.
Even a relatively small rent increase of three percent in a large apartment complex based on property improvements increases investor profits. This leads to a significant upswing in your return on investment (ROI) as an apartment investor.
Valuable Tax Benefits
Current U.S. tax laws provide valuable benefits for property owners and investors. You will discover multiple strategies and techniques that you can use to lessen your tax payments. Two of these strategies are accelerated depreciation and cost segregation studies.
It is very helpful to engage the services of a knowledgeable professional. Experts in real estate taxes can lower the amount of your taxable real estate related income. You can then enjoy a larger percentage of your real estate investing (REI) profits.
Third-Party Management
When you invest in large multifamily properties, you can afford to hire a third-party management company for your apartment buildings. Your management company can handle any and all issues involving tenants or building maintenance. With one or more large apartment complexes in your real estate portfolio as an investor, you are earning impressive ROI.
You are receiving significant and reliable cash flow each month from tenants’ rental fees and getting dividends from your investments. You can easily afford to hire a quality third-party company to manage your properties. This management team will also handle building upkeep as well as any tenant problems that may arise.
Forced Appreciation on Assets
Investing in large apartment buildings also enables you to force appreciation. Appreciation on a single-family home typically occurs when the market price of other comparable homes in the neighborhood increases. Yet the value of large apartment buildings and complexes is determined according to the rental income that they generate.
Rental fees in these properties can be increased when additional services and amenities are added to the buildings. These amenities and services may include enhanced security, ATM machines, laundry rooms or services, parking facilities or gyms and health clubs. By correcting any inefficiencies or wasted resources in apartment building maintenance services, apartment investors can also gain greater income from rents.
Lower Property Debt
The total net operating income (NOI) of a multifamily apartment building lowers the property debt. To compute the NOI on a property, subtract the sum of the building’s expenses (before debt) from its gross income. The NOI can fund the debt repayments. It can also lower the balance due on the debt while providing equity.
Large Property Portfolio
Investing in multifamily real estate is an ideal way to build a large property portfolio of lucrative apartment rentals. This type of real estate investing through syndication also enables you to build your portfolio within a relatively short time. Even novice passive investors can quickly understand the valuable benefits of investing capital in a 50-unit apartment building.
The ROI will be much greater than the returns received from investing in 50 different single-family homes. After pooling your capital with other investors in a multifamily syndication deal, you simply let the sponsor manage the project. You can be researching additional attractive investment opportunities while waiting to receive cash flow and dividends from your first investment.
Consolidated Real Estate Management
Many property investors who buy single-family homes have small to moderate-size real estate portfolios. It would be too expensive for them to hire a property management company without a larger and more lucrative portfolio of assets. Since investors in multifamily properties make more monthly income, they can afford to outsource their real estate management services.
Valuable Knowledge from Experienced Investors
Investors who are new to big apartment investing can learn many valuable aspects of investing through real estate syndicates from experienced investors. There is a learning curve to becoming a successful passive investor. One valuable advantage to property syndicate investing is that novice passive investors can gain essential information from both the sponsor and the other investors.
Investment Distribution Waterfall
When you participate in a big apartment syndicate investment as a limited partner (passive investor), you will review the Private Placement Memorandum (PPM). This document contains an in-depth description of the current investment project. It also explains the distribution waterfall for this investment.
The waterfall structure reveals how the investment profits are distributed to the syndicate general partner (sponsor) and to the limited partners (passive investors). The PPM details the full report of all capital distributions from the initial investment date and continuing until the property is sold.
The two most important aspects of the distribution waterfall structure are:
- The majority of a syndication property investment’s profits should be issued to the limited partners; and
- Most of the general partner’s profits should be issued according to the overall success of their performance. By generating an impressive ROI for the limited partners, the general partner knows that their own financial returns will be greater.
Syndicate Structures: Sophisticated and Accredited Investors
Syndicate structures may be designed to include accredited and/or sophisticated investors. Most REI syndicates are designed using one of two SEC Regulation D exemptions. Exemption 506(b) stipulates that up to 35 investors for each separate property deal must be sophisticated.
These sophisticated passive investors must have valuable knowledge and understanding of the field of finance to share. Yet they do not need to have a high net worth. There is no limit to the number of accredited investors who can be included in syndicated property deals. Under this exemption, syndicate sponsors can offer new big apartment building investments only to their existing client base.
Property syndicates that are structured according to the specifications of Exemption 506(c) require all passive investors to be accredited. This means that every participating investor must have a net worth of no less than one million dollars. This million-dollar personal net worth cannot include the market value of home property.
Other investors with incomes of $200 K for singles and $300 K if they are married can also qualify as accredited investors. Investments that are ruled by Exemption 506(c) must be verified, usually by a CPA or an acceptable third party.
Getting Involved in Big Apartment Investing
You may have a strong desire to get involved in multifamily real estate investing. Yet, like many people, you may lack the several million dollars needed to buy a large apartment building on you own. If this is your current situation, you can choose such options as the following:
- Invest Through Multifamily Syndication. Engage in big apartment building investment deals with a multi-unit property syndication company. This enables you to pool your capital with other passive investors to fund a large property investment project. You and the other passive investors, along with the syndicate sponsor, can enjoy the financial benefits of significant cash-flow payouts and dividends.
In addition, you have no responsibility for the management or eventual sale of the investment property. These duties must be handled by the sponsor. Yet you must perform careful due diligence to ensure that the syndicate that you invest with is a respected, high-quality and successful company. You should also be certain that the properties offered for investment by this syndicate are aligned with your investing goals.
- Become a Multifamily Property Syndicator. You may have the knowledge and skill to raise funds, locate profitable large property deals and build an investing team. If you do, you are ready to become an REI syndicator. Just ensure that you can successfully build a reliable team of passive investors.
You must also know how to determine the most lucrative investment properties and create a strong business plan. It is essential for you, as the syndicate sponsor (general partner) to establish good communications with your passive investors (limited partners). You must also have expertise for making investment transactions, managing the investment project and, eventually, making a lucrative sale of the property.
Concluding Thoughts
Participating in big apartment investment projects with a respected and successful multifamily real estate investing syndicate can be quite lucrative. It is an ideal way to receive impressive cash flow and dividends for acquiring wealth and building your property portfolio.
Before starting to invest, take time to perform due diligence on any syndicate that you may want to invest with. Examine their rate of success and the types and values of the investment properties that they offer. In addition, improve and fine-tune your own property assessment and investing knowledge and skills. Taking these actions can prepare you for becoming an informed, experienced and highly successful big apartment investor.