With a passive multifamily real estate investment, all of the below benefits are truly value add to an investor’s financial security and wealth creation. Whereas with an active investor, you not only don’t receive the below-highlighted benefits but rather, have to be “all hands on deck”. Often, investors prefer to passively invest to allow themselves to focus on their primary business/es. And the importance for investors is to ensure they are investing with a best-in-class multifamily investment management firm or individual transaction sponsor who solely specializes in the acquisition and management of multifamily properties.
The barriers to entry for passive investing are much lower than an active approach. An individual does not need to be a multifamily expert or have detailed knowledge of the tools and systems used to acquire and manage these assets. They need to meet certain income and/or net worth requirements.
Multifamily investment firms are experts in the space. It is all they do on a daily basis and individual investors who work with them get the benefit of their relationships, software tools, expertise and time. These are extremely valuable assets in commercial real estate investing and can have a positive impact on investment returns.
A passive investment provides investors with the benefits of multifamily ownership without the hassle of actually managing the property. This provides them with passive income so they can use their time to pursue other interests.
Investments with a multifamily transaction sponsor provides two important tax benefits for individual investors. First, all property income and expenses are run through the LLC and anything left over is “distributed” to individual investors. Second, individual investors can defer capital gains taxes on a profitable investment by utilizing a specialized type of transaction known as a 1031 exchange.
Multifamily investment firms have the ability to source capital from a large number of real estate investors. They can afford to buy higher quality apartment buildings that are in better locations and have more stable cash flow. For individual investors, it can be more advantageous to own a fractional share of a high quality asset than a 100% share of a lower quality asset.
A multifamily real estate investment is often compared to other alternatives available such as those in the stock or bond market. Many passive investments are not publicly traded, which means that they also benefit from a degree of price stability not seen in publicly traded debt and equity markets.
For those who are convinced of the benefits of a passive multifamily investment, there are two common investment vehicles through which this can be accomplished:
REITs are a specialized type of investment firm that provide investors with exposure to commercial real estate assets. REIT shares can be publicly traded on major stock exchanges or they can be privately offered to accredited investors. REITs can also specialize in certain property types.
Multifamily investors can work with an individual deal syndicator who is raising capital for the purchase of one specific rental property. This scenario provides less liquidity, but it also provides investors with direct knowledge of the property they are investing in so that they can complete their own due diligence.
