Real estate investment is of various types, including investing in multifamily properties. These properties include apartments, duplexes, and other buildings classified as Class A, B, and C. These house several families.
The multifamily investment market is considerable in size, occupying almost 42% of the real estate market from investors such as Lincoln Frost. The popularity of this investment strategy over the years is attributable to its numerous advantages.
Most investments of this type are passive investments, in which multifamily private equity firms allow investors to invest in large properties that they would be unable to by themselves.
But what is a passive investment? It refers to a method where people invest in a real estate asset with an equity firm without playing the active role of a landlord. It is the best option for individuals investing in large properties who lack the time, knowledge, and expertise to manage them.
What role do these firms play, and how can they help with passive investment in multifamily properties? Continue reading to find out below.
Role of multifamily private equity firms
As mentioned above, private equity firms allow people to become passive investors in multifamily Class B and Class C properties. The responsibility of finding a suitable property (with a high return potential), collecting funds, forcing appreciation, and managing the asset falls on the syndicator (the equity firm).
What is real estate syndication?
It refers to a process in which two parties raise capital to purchase a property. The equity firm plays the role of the syndicator, organizing and managing the entire passive investment process. Real estate syndications are particularly useful for investors without prior experience in investment strategies.
However, the biggest benefit of such syndications is that they enable investors to become a limited partner (LP) in exclusive investment opportunities at significantly less capital than is otherwise required for such deals.
What are some of the benefits?
There are various benefits of forming a partnership with an equity firm specializing in buying and managing multifamily Class B and C properties.
Steady cash flow
Most investors enter such deals because they are guaranteed a steady cash flow, and investors receive fixed returns to their bank account monthly or quarterly. Every month, the firm’s representatives collect rent from the tenants, excluding the operating expenses, giving them the net operating income (NOI).
Deducting the debt service from NOI provides the total cash flow available for a month, which is distributed between the syndicator and investor.
Forced and market appreciation
The NOI determines the value of multifamily properties. When the NOI increases, it causes an increase in the overall value of the property.
Equity firms achieve this through forced appreciation, involving measures like increasing rent, buying the right properties, cutting operating expenses, etc.
Market appreciation happens in two ways. The first involves buying a property based on the four real estate cycles: recovery, expansion, hyper-supply, and recession. The other is through a value increase because of market factors.
Investors enjoy various tax benefits usually associated with commercial real estate, as they have ownership in the property’s LLC purchased by the syndicator.
Some benefits include utilizing paper loss (unrealized loss because of a fall in the property’s price), cost segregation, and cashing-out refinancing (a process (of taking a higher loan amount than the one existing for a property and converting the difference into cash).
Multifamily private equity firms enable you to invest passively in Class B and C properties at low costs. They take care of the property while ensuring investors receive a steady cash flow and enjoy tax advantages.