"More Than Half Of My Net Worth Has Come From Multifamily" – Investors Weigh In On Real Estate Investing
One of the most interesting subreddits is RichPeoplePF. It's an offshoot of Reddit's popular personal finance content and caters to the issues faced by the wealthy and those aspiring to be wealthy.
Around nine months ago, investors shared their thoughts on multifamily real estate investing as a wealth builder. One investor expressed interest in investing in multifamily real estate as a limited partner because they were too busy to manage real estate actively and wanted to diversify from stocks as well as build a stream of passive income.
One investor who had invested in syndicated multifamily real estate for 14 years called it the best discovery in investing. "It has made me millions and more than half of my net worth has come from multifamily RE," the Redditor added.
Syndicated multifamily real estate investing generally involves being a limited partner (LP) in a project to develop or renovate a property. Limited partners don't share in the liability or decision-making but can share in the profits. The general partner (GP) sets up the project and manages it to completion and communicates with all limited partners.
The Redditor noted that finding the right partner is crucial. "Most of these projects were getting me 20%+ annualized returns in a very tax-friendly way. And I would either roll the profits into the next project or we'd do a 1031 exchange into a bigger property," he added.
Another Redditor who is a general partner in non-multifamily real estate deals chimed in, saying that finding a trustworthy and competent GP is crucial. Several investors also mentioned the significance of real estate tax breaks, including depreciation, which can apply to direct and indirect investors.
A Look At The Landlord’s Side
Not everyone who posted was a limited partner. Several investors shared their experiences of owning buildings directly. One investor had a positive experience living in a multifamily building and renting it out, but the trouble began when they picked up another building next door. The second building took much longer than the first and the investor plans to sell it soon. "I will not buy another multifamily building but would opt for a REIT if I cared to stick with real estate."
The positive side of being a landlord is that it becomes an education that can pay off for anyone who moves into a limited partner role. By understanding the true boots-on-the-ground issues, they may be better equipped to know when something is going wrong.
The investors also mentioned the role of due diligence and ensuring that the project’s assumptions are correct. An investor who has participated in a dozen of these deals said that while the run-up on rents in recent years may have led to profits, those conditions are not guaranteed to continue. One GP investor said it has to be the "right sponsor, right markets and right business plan."
There are several options for those interested in dipping a toe into multifamily investing. The easiest is to select a publicly traded real estate investment trust that operates multifamily properties, such as MAA (NYSE:MAA), which has a 3.73% dividend yield and owns properties around the U.S. with a concentration in the Sunbelt.
Those who can spend a minimum of $15,000 could also check out EquityMultiple's Foundations Portfolio: Multifamily. This portfolio has a 3.5-year hold period and targets a net investor rate of return of 17.9%. It offers some return benefits of multifamily investing while spreading the risk around multiple assets.
No investment is perfect, but multifamily real estate can be a reliable source of income for investors. The industry is currently facing a bit of oversupply, which has caused rent to drop in some areas. However, there are already signs this is improving. The overall demand for housing means that the investment class will likely remain strong.