How to Make Passive Income in Multifamily Real Estate: A Guide for Busy Professionals

Are you a busy professional looking to invest in real estate but don't have the time or expertise to actively manage properties? Passive investing in multifamily (Apartment Complex) real estate syndication may be the solution for you! With the right approach you can generate significant amount of passive income, without lifting a finger. This allows you to stop trading your precious time for money and being able to spend that extra time and money with your loved ones or pursuing your passions! In this guide, we'll cover everything you need to know about passive investing in multifamily real estate, including tips for choosing the right investment, how to use your retirement accounts to invest and diversify your portfolio, managing risk and more.

Multifamily Real Estate Investing

Multifamily is any real estate that has multiple living units of two or more. At RA Multifamily Investments, we specialize in larger apartment complex of greater than 80 units. This is what we will be referring to when you read the word Multifamily.

Larger units offer economies of scale, which can lead to lowering operating expenses per unit and potentially higher cash flow. Additionally, properties with more units typically attract a more professional management company, which results in improved operations and higher satisfaction for residents. Furthermore, larger properties often have a more diverse pool of residents, which can reduce the risk of vacancies and rent fluctuations.

For example, if you buy a duplex, a two-unit property, and you lose one resident, you will lose 50% of your revenue! Depending on the type of property, which we will discuss later, and the business plan some properties can cover all expenses with around 68% - 75% occupancy. This is called the "breakeven occupancy" that indicates the occupancy needed to cover all expenses of the apartment community.

What is a Syndication?

A syndication is simply a group of people or investors who pool their money and other resources together to purchase and manage a real estate property. The syndication is typically managed by a sponsor or a general partner (GP) who is responsible for finding the property, overseeing the renovations and improvements, and managing the day-to-day operations of the property, this would be us at RA Multifamily Investments. We would partner with people like you, who want to invest but don't have the time or expertise to do so. This would be the investors who contribute money to the syndication who are known as the limited partners (LPs).

Passive investing in a Syndication

Passive investing in a syndication means that the investor contributes money to the deal and receives a portion of the profits without actively managing the property. Allowing you to earn passive income without the hassle of managing the property. No cleaning toilets, picking up trash, no dealing with tenants. All of that is handled by the General Partners. The syndication structure typically involves a General Partner (GP), who is responsible for finding and analyzing the right investment opportunity, acquire and manage the investment and Limited Partner (LPs), who provide the capital to fund the deal.

As an LP in a syndication, your role is to provide capital and share in the profits generated by the investment. Unlike active real estate investing, where you are responsible for spending time to find, acquiring and managing the property, passive investing allows you to earn a return on your investment without the responsibilities of property management.

The GP is responsible for finding and acquiring the property, managing the day-to-day operations, and making decisions about the property's financial strategy. In return for their services, the GP receives a portion of the profits generated by the investment, typically in the form of asset management fees and a share of the profits. The LPs, on the other hand, receive a portion of the profits based on the amount of capital they have invested.

Advantages of Passive Investing in Syndications

One of the main benefits of passive investing in a syndication is the ability to earn passive income without the hassle of managing the property. With passive investing, you are essentially outsourcing the day-to-day responsibilities of property management to the GP, who is responsible for ensuring the property is properly maintained and generating income for the investors.

Another benefit of passive investing in a syndication is the ability to diversify your portfolio. By investing in multiple syndications across different asset classes and geographic regions, you can reduce your risk exposure and potentially earn higher returns than you would by investing in individual properties. This also allows you to diversify from the volatile stock market and into a more stable investment.

LPs can also benefit from the potential for appreciation in the value of the property over time. as the property increases in value, the limited partner's share of the profits from a potential sale of the property may also increase, allowing them to realize a capital gain on their investment. With RA Multifamily Investments, we force appreciation, we are constantly being proactive and not waiting for time to pass. Forced appreciation is when the operators or GP implement a business plan to increase revenue or decrease expensed.

Overall, passive investing in a syndication can be a great way to earn passive income and diversify your portfolio. However, it's important to do your due diligence and carefully evaluate each investment opportunity to ensure it aligns with your investment goals and risk tolerance. We'll get more into that later.

Choosing a Passive Investment

Choosing the right passive investment is key to success in real estate investing. This will be the only portion of the investment that is not passive. No worries, you can do this from the comfort of your home, but it is a very important things to do before investing.

Evaluate the Track Record of the Sponsor: looking for sponsors with a proven track record of success in managing properties and delivering returns to investors to investors. There are several ways to go about this, directly ask the sponsor to provide information on their past performance and returns. You can also ask for references to investors who have invested with them in the past. Network with other sponsors or investors and ask if they know the particular team you are looking to invest with. It is important to invest with a team who has experience in multiple economic states. Anyone can have success in an upward economy, but only strong and experienced operators or GPs continue to have success in an up or downward economy. Additionally, it is important to understand and evaluate the sponsor's investment strategy and ensure it aligns with your investment goals and risk tolerance. Look for sponsors who have a clear investment strategy and can demonstrate a solid plan for managing the investment property.
Researching the Market and Opportunities: Research the market and identifying the investment opportunity is a critical step in successful real estate investing. It is important to get a sense of the local economy of where the investment property is located. Looking at demographic trends, such as population growth, job growth and median household income, to gain knowledge of the local economy. Most times the Sponsors of the deal will have this information, but it is always important to verify the information they are providing. A few other things to consider is crime rate in the neighborhood, and school district ratings. We have a separate post on how to get a sense of the local economy and doing market research for you to learn more!
Understand the Investment Structure and Terms: Carefully review the investment structure and terms is crucial when evaluating a syndication opportunity. The investment structure and terms are typically outlined in what is called a Private Placement Memorandum, a document that outlines the terms of the investment, primary risk factors, summary of the offering, basic disclosures explaining general partner information, asset description and legal agreement and the subscription agreement. The sponsors will outline the returns, it's important to understand that these are simply projected returns, and it is up to you if you think those are competitive return on investment (ROI) relative to the level of risk involved. Additionally, understand the investment structure that will define how profits and losses will be distributed among the partners. Lastly, understand the exit strategy which outlines how the investment property will be sold or refinanced to return capital to investors. This is important to make sure the exit strategy aligns with your financial needs and investment goals as once you invest your money is in for the duration of the holding period.
Evaluate the Risks and Potential Rewards: Evaluate the potential risks and rewards of each investment opportunity ties back to the previous bullet points but there are a few additional things to consider. As mentioned above, once you provide the capital to the sponsor, your money will be invested for the duration of the holding period. If you need your money back quickly this might not be a good investment option for you, as most holding periods range between 3 - 7 year and sometimes even up to 10 years. Additionally with risk, it's important to understand the risks factors in the investment strategy, such as value-add or core-plus. A value-add strategy may involve more risk but can also offer higher potential rewards if executed successfully. If you have a lower risk tolerance, you may want to focus on investments core-plus strategy, which involves less risk but also lower potential rewards.

Diversify Your Portfolio

To Effectively manage risk in real estate investing, diversification is crucial. Many individuals find themselves trapped in the "Rat Race" or "Golden Handcuffs," where they engage in a cutthroat competition for wealth against their colleagues with the misconception that their employer will help them achieve financial stability. As a result, they rely on a 401K retirement fund. Investing in real estate syndication can accelerate your retirement funds and not have to wait until you're too old to pursue your passions or fun activities you've always wanted to do. Imagine going into retirement and the stock crashes and you have no money to retire. What will you do then, keep working another 25+ years? Retirees lost 23% of their 401(k) savings in 2022, Fidelity says. Diversifying your investments into real estate can help manage some of that risk.

Using 401(k) and/or IRA to invest in Multifamily Real Estate

Did you know you can use your 401(k) and/or IRA to invest in multifamily real estate? Depending on which retirement fund you currently have you will need to "Roll" it over to a self-directed IRA or 401(k). Setting up a self-directed IRA or 401(k) is relatively easy, but it's important to work with a qualified custodian to ensure compliance with IRS regulations. You also want to "transfer" or "roll" it into a self-directed and not just pull the money out to avoid paying any fees. This will fee your money from the volatile stock market and give you more freedom to invest in different investment types, such as multifamily real estate! In a self-directed you can continue to invest in the stock market if you choose to do so as well! If this is of interest to you, reach out to us at RA Multifamily Investments if you would like a referral to a qualified custodian who is an expert in the subject matter and can explain more about it.

Accredited vs non-Accredited Investor

This topic is important one to cover that will help determine how you can get started. Let's first go through what is the difference between accredited and non-accredited investors. To qualify as an accredited investor, you need to satisfy one of the two requirements set by the Securities and Exchange Commission (SEC). (Yes, there are laws to help protect you from bad GPs/Sponsors) Accredited Investors are individuals or entities that meet specific financial thresholds and regulatory requirements, allowing them to invest in private offerings and other investment opportunities that are not available to non-accredited investors.

One of the two financial threshold requirement must be satisfied:

An individual must have a net worth of at least $1 million (excluding their primary residence).
An individual must have an annual income of at least $200,000 (or $300,000 for a married couple) for the past two years and a reasonable expectation of the same income level in the current year.

Accredited investors have access to a wider range of investment opportunities, including private equity, venture capital, hedge funds, and other private placement that are not available to non-accredited. Accredited investors are subject to fewer regulatory requirements, as they are presumed to have a higher level of financial knowledge and sophistication. They can demonstrate their status as an accredited investor by providing documentation such as tax returns, bank statements, and other financial records to the investment sponsor. Non-accredited investors, on the other hand, are subject to more stringent regulatory requirements to protect them from higher-risk investments. If you qualify as an accredited investor, you simply need to follow the steps above of finding the strong sponsor team and you are able to invest in what is known as a 506c and/or 506b offerings. The main difference in the two is that in 506c, all investors must be accredited. Whereas in 506b offerings allows sponsors to raise an unlimited amount of capital from accredited but only up to 35 non-accredited investors who meet certain financial and sophistication requirements.

If you are a non-accredited investor, you need to be what is considered a sophisticated non-accredited investor. You must have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a potential investment. Sponsors cannot just simply take your money! While there is no specific definition or criteria for what constitutes a sophisticated investor, the SEC provide some guidance on the factors that that sponsors can consider when evaluating investors' sophistication,

Professional experience: An individual's professional experience in finance or business, such as experience in a particular industry or as an executive in a company, can indicate a level of financial sophistication.
Education: Advanced degrees or certifications in finance, business, or related fields can demonstrate a level of financial knowledge and sophistication.
Investment history: An individual's history of investing in private placements, venture capital, or other non-publicly traded securities can suggest a level of sophistication.
Professional advisors: Whether an individual has access to financial or legal advisors who can provide guidance on evaluating investment opportunities.

Additionally, non-accredited investors are limited to 506b offerings. These type of offerings restrict sponsors from general solicitation or advertising to market these securities, meaning you will not see any posts on social media or anywhere online. Non-accredited investors will need to have a pre-existing relationship with sponsors in order to have the opportunity to invest in multifamily real estate. So book a call with us and let's get to know each other!

Managing Risk

Real estate investing, like any investment, comes with risks. Here are some tips to remember for managing risk in passive real estate investing:

Understand the Risks: Carefully evaluate the risks associated with each investment opportunity, including market risks, property-specific risks, and sponsor risks. Older properties with heavy value add runs higher risks but typically higher returns as well, it will need a strong and experienced sponsor managing the investment.
Diversify Your Portfolio: Diversify your portfolio across different types of properties, locations and sponsors to spread your risk.
Work with Experienced Sponsors: Always make sure who is behind the deal, who is the asset manager keeping up with the day-to-day and always ask questions. Choose sponsors with a proven track record of success in managing properties and delivering returns to investors.
Stay Informed: Knowledge is key component to success. Stay informed about market conditions, economic trends, and other factors that may impact the performance of your investment. "See something, say something" meaning if you see interest rates or economic down turn, or that the investment property is rundown and old, ask the sponsor how are they preparing for these concerns.

Remember these quotes.

"An investment in knowledge pays the best interest" - Benjamin Franklin

"The greatest investment you can make is to invest in yourself" - Warren Buffet

Conclusion

We truly believe that passive investing in multifamily real estate can be a fantastic and lucrative way for busy professionals to generate passive income and build wealth. As someone who has personally invested in real estate, we have seen the benefits of this type of investment firsthand.

RA Multifamily is here to help you invest in multifamily real estate and start your path to financial freedom. By investing in professionally managed properties with RA Multifamily, investors can enjoy the benefit of real estate ownership without having to devote significant time and effort to property management. The regular stream of passive income can provide financial security and the freedom to pursue other interests and passions, or accelerate your retirement funds so you don't have to keep trading your time for money at a job.

Hope this guide has provided you with valuable insights and guidance on how to make passive income in multifamily real estate investing. There are multiple way to fund your next investment using Cash, an LLC, Trust, or self directed IRA or 401(k). You don't have to worry about your life savings riding the stock market rollercoaster. Multifamily investing provides a more stable investment than the volatile stock market but remember that it takes careful consideration and research. With the right approach and support, you can achieve your financial goals and build long-term wealth.

As always, it's important to seek advice of a qualified financial professional who understand your specific situation before making any investment decisions. Whether you invest with RA Multifamily Investments or simply need help with evaluating an investment opportunity with others, we are here to help you with your multifamily investment needs.