In a prior article, we covered key reasons why we like multifamily as an asset class. In an effort to present a balanced view, in today’s real estate snippet we wanted to discuss the top 5 reasons why you might not want to invest in multifamily.
Higher Entry Cost. Purchasing an apartment building is not only more expensive from a purchase price perspective, but will also require higher financing and down payment amount (typical loan to value is 75%) and upfront cash reserves (discussed in a prior article). In order to accomplish this, one needs to either raise the capital from passive investors, partner with other operators, or (in most cases) do both. Financing is also a bit more complex and has additional requirements pertaining to the property (e.g. occupancy, concentration caps, etc.) and the sponsor (net worth, liquidity, experience).
Asset Management Requiring Close Involvement. When one buys a property, one makes an investment. However, operating the property and managing the asset is essentially like running a business, whether you self-manage (for smaller properties) or manage the property manager. Thus, unless you invest as a limited partner (LP), you are indirectly still dealing with tenants, toilets, and trash. As with any business, you need to be abreast of the competitive landscape and market trends. Not that you do not have to be informed of such if you own other asset classes or a single-family home, but it is even more relevant for multifamily as you create and execute the business plan. All of that requires a solid knowledge base and a good level of experience (or at a minimum being part of an experienced team, which leads us to the next point).
Team Sport. Due to multiple aspects of the deal and its larger scale, you will need partners on your team to take deals down – acquisition (deal sourcing and broker relations, underwriting, diligence), asset management (executing on the business plan and day to day operations post-close), and investor relations (capital raising and ongoing investor management and communications). If you are not a team player or prefer to work on your own, then that may create a challenge. Even if you take down a smaller property (16 units or less) on your own, you will eventually need a team if you want to expand and scale-up further. It is also important to have a team with aligned visions/goals and a good experience level.
Regulations. This is relevant in general for any business but is particularly important if you are syndicating multifamily investments, as you are in essence issuing securities. If you do not follow the pre-established rules of the road and the regulations, you may risk hefty fines or imprisonment. Beyond syndications, there are also leasing/tenant laws, which one needs to follow (your property management firm should be well versed in those).
Less Liquid Investment. While this last factor pertains to real estate in general (vs. multifamily only), it is important to remember that unlike other asset classes (stocks), it may take up to 60 days or more to sell the property (or less if the market is as hot as it is today), i.e. it is not something you can liquidate overnight. In addition, if the deal was taken down as syndication, you will have post-close activities to address (e.g. tax filings and returns) and may need to keep the LLC created for the specific transaction active for any incidentals that may pop up post-close, including tax filings.
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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.