Depending on each individual’s opinion of complicated, yes, multi-family investments can be considered one of the more complicated assets to own. Apartments tend to be the most management intensive commercial real estate sector. If you do not know what you are doing, you could be taking on a significant amount of risk. On the other hand, because multi-family investments tend to be complicated, it present opportunities to create a lot of value if you are an experienced owner/operator.
If you are a first time multi-family investor, it may be difficult to qualify for quality financing. Financing is a tool that provides leverage to possibly increase your rate of return. Many lenders require that borrowers have a track record of experience, along with meeting certain financial criteria, which significantly reduces the chances of new multi-family investors being approved for a high quality loan.
Yes. Many investors prefer to invest through a Self Directed IRA, which allows them to defer taxes on any capital gains. Unfortunately, many traditional retirements accounts (401k, 403b, traditional IRA, etc.) do not allow direct investments in tangible real estate. They consider it to be a alternative asset, which is typically deemed as higher risk. Unfortunately, many investors do not realize that investing in the public secondary markets can be some of the most risky, lowest yielding investments.
It depends. As mentioned in question 2, if you would like to leverage your buying power, you must meet certain financial criteria with the lender, which can be difficult for most investors. If you cannot qualify on your own you must purchase the building with your own funds or pool funds with other investors, which presents a whole new set of challenges (securities law) if the investors plan on taking a passive role.
First, know your investment. This is the primary advantage of a single-property investment. You have the opportunity to know the property, its market, prior financial results, proposed improvements and the manager's plan to improve property valuation and cash flow. Read the offering documents carefully. Understand how gains are distributed and what the risks are. All investing involves risk and there is always the potential for loss as well as gain. Understanding the investment, its potential and risks, and whether or not it fits with your risk tolerance is always your best protection.
To invest in an LLC or Limited partnership offering, you must be a qualified investor.
In the United States, to be considered an accredited investor, one must have a net worth of at least one million US dollars, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.
An accredited investor may also be:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
The actual amount to invest in the multi-family offering will depend upon the structure of the individual property offering.
Real estate LLCs and LPs typically have a real estate professional as the manager with the project investors being the members. The manager exercises control over all aspects of the project including day-to-day operations; this removes the responsibility of daily management from the investors, although, the LLC may be structured to allow members voting rights on major decisions related to the property. Liability exposure is limited to the amount of investment by each member. The tax advantage of investing in real estate still apply fully to the individual members.
LLC and LP investments allow 1031 Exchanges, referring to the section of the Internal Revenue Code that allows for the deferral of gains or losses from the sale of real property when specific guidelines are met and appropriate replacement property is identified and acquired in a specific time period.
Regardless of the ownership form, real estate investments are considered highly speculative and involve a high degree of risk. There are inherent risks to real estate investing, whether securitized real estate or un-securitized real estate. These include but are not limited to; the absence of guaranteed cash distributions; lack of liquidity; measurable and immeasurable risks of owning, managing, operating and leasing properties; possible conflicts of interests with managers and affiliated persons or entities; the risks associated with leverage; tax risks; declining markets and challenging economic conditions as well as the risks associated with executing an exchange including but not limited to; disallow ability of a 1031 exchange, changes in tax laws, fees to execute an exchange or other known or unknown regulatory challenges.
Contact our offices and let us know you are interested in learning about upcoming investment options. We will need to ascertain that you are a qualified investor before providing you with further information. Once you are approved as a qualified investor, you will be provided updates on investment opportunities.