Differences Between Multifamily Investments
There are different types of multifamily investments. Which suits your investment strategy?
Just as there are many reasons to invest in multifamily properties, there are also quite a few ways to invest in them. The type of investment made for a multifamily property determines much more than a stake of ownership. Here are the major types of multifamily investment strategies and what each means for the investor:
Direct: Direct investing is exactly what it sounds like: an investor, or more precisely, a limited liability company (LLC) or another form of a corporation owned by the investor, purchases a multifamily property directly. Generally, this is a good idea for investors with enough funds to purchase a property themselves, particularly those who would like to maximize control of their investment (and perhaps hold onto it for the long run).
As a Limited Partner: As a limited partner (LP), an investor buys into a piece of multifamily real estate but makes few (if any) decisions about how it will be managed and takes on little (if any) risk. This is best for investors who are sophisticated enough to understand multifamily investing quite well but may not want to put the time and effort into managing an investment themselves. It can also be a good idea for investors with a fair amount of investment money, but not enough to purchase their ideal multifamily property themselves.
As a Syndicator: As a syndicator, an investor is typically a general partner (GP), and will solicit investments from one or more LPs, thus taking on most of the risk and legwork of a multifamily investment deal. As a result of the additional work and risk they take on, the GP/syndicator will often command certain fees, including a certain percentage of all LP money invested in the project. They will also be rewarded if a project becomes particularly profitable via something called a waterfall and promote structure. Basically, this means that if a project reaches a certain profitability hurdle, the GP will command a higher percentage of the profits beyond that hurdle.
As a Developer: Compared to any other type of investor on this list, developers generally take on the highest risk and receive the greatest rewards. A developer often takes a project from a piece of raw land to a finished property, secures financing, hires architects and engineers, and contracts with a construction company (although some vertically-integrated development/construction firms build projects themselves). Most developers are professional firms or high net-worth individuals, but this isn’t always the case. In many cases, developers are also syndicators/GPs, and may have one or more LP investors contributing funds to their projects.
Joint Ventures: In many cases, real estate development projects can also be classified as joint ventures. Joint ventures occur when two or more parties work together to develop a project. Typically, one partner brings expertise while the other brings the capital. In most cases, the partner (or partners) bringing the expertise is also the GP, while the capital providers are LPs.