Have you wanted to invest in apartment buildings but don’t know where to begin?
For many renting is a way of life, and more people are choosing to rent rather than buy, even if they can afford to purchase a home. The myth that renting is “throwing away money” as compared to the high costs of home ownership has been busted.
Can you take advantage of the fact that it’s acceptable, if not en vogue, for many to be renters for life? Of course you can. You just buy the places everyone else is renting!
Easier said than done? Maybe. But Dr. Peter Kim shows us that there are at least a half-a-dozen ways to approach this.
This post originally appeared on Passive Income MD.
6 Ways to Invest in Apartment Buildings
By now, you probably know that real estate investing is a passion of mine. It’s one of the best ways to earn passive income that I’ve found, and it’s what’s helped me achieve the financial freedom I now enjoy.
The phrase “real estate investing” is very broad, though, and there are a lot of ways to get into it. One of my personal favorite methods is investing in apartment buildings (otherwise known as multifamily properties).
But deciding to invest in an apartment building is only the start. There are quite a few different angles to consider. The way you choose to pursue depends on how involved you want to be, how much capital you have, how much time you want to commit, etc.
I’ve discussed how I bought my first apartment building before, but if investing in a multifamily property has piqued your interest, then this article can provide a good overview on the ways you can do just that.
Here are six ways to invest in apartment buildings:
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1. Buy It Yourself
The first and perhaps most obvious method is to simply buy the building yourself. Of course, this requires the most upfront capital, and it can be the most intimidating of the methods listed here. After all, it’s all up to you to make sure everything goes right. It involves doing the proper due diligence. You’ll need to do most, if not all of the following:
- Save the funds
- Know your budget
- Team up with a broker
- Review deals
- Make an Offer
- Get it accepted
- Find a loan
- Find property management
- Decide if/when to sell
Yes, it’s a little more involved, but the benefits can be tremendous. It’s like owning your business. You get to decide the strategy behind the investment. Are you going to keep it for the long term and live off the cash flow? Are you going to keep it cash flowing until it’s a good time to sell? Maybe you’re going to exchange it into another property.
Whatever the case, owning the property means that you get to make all the decisions and can base it off of what’s going on with your life at the moment, not just the overall strategy.
2. Buy It With a Partner (or Partners)
When I purchased my first apartment building, I did it with a partner. I wanted to purchase in a certain up & coming area, and I didn’t have all the funds I needed to make it happen. So, I partnered with a friend, pooling our capital.
Neither of us had any experience with multifamily properties, but we learned together. We told ourselves this would be our real estate education, and it really has been an amazing learning experience. I’ve since gone to purchase my own multifamily property, and the knowledge from that first purchase has been invaluable.
The downside of buying with a partner is that you don’t get to make all of your own decisions. You might have different visions for the property. For example, someone might want to spend more on the renovations and try to create a nicer class of property. The other, however, might not want to put in more money for renovations.
Then, when it comes to selling or exiting the property, one might want to keep the property for the long term and the other might want to sell it.
Having a partnership can be a tricky dance, but that’s why you need to go in with your eyes open. You also need to document and discuss everything you can beforehand. If you find the right partner, though, it can be a very rewarding (and lucrative) experience.
3. Invest In a Syndication
A “syndication” is a pooling of funds in order to purchase a property (in this case, an apartment building).
Remember that long list of things you have to do when you’re buying a property by yourself? In this case, the syndicator, or the one running this investment, will do all of those things for you.
Then, instead of just purchasing it on their own, they will open the opportunity for investors to purchase a small stake in the building.
The syndicators are what’s known as “general partners,” and investors are known as “limited partners.”
General partners make all the decisions and actively run the property according to the business plan they’ve laid out.
Limited partners are considered passive investors. All they have to do is collect distributions and a large share of the profit when the property is sold.
4. Invest in a Real Estate Fund
A real estate fund is capital that is raised with the intention of buying multiple apartment buildings. It is typically “blind,” meaning that investors bank on the reputation of the fund managers, their business plan, and their track record rather than the property itself.
The fund managers take investor funds and decide where to invest, as well as all the major decisions surrounding the apartment buildings. For example, they decide how to renovate and when to sell.
[Check out this post for the pros and cons of investing in a syndication vs a real estate fund]
In short, with a real estate fund, you get more diversification because you’re able to invest in multiple properties. However, the minimums tend to be higher. Plus, you’re investing without necessarily knowing the exact properties you’re investing in.
5. Invest in a REIT
A REIT is a large corporation that runs and manages multifamily properties. When you invest in a REIT, you’re buying shares in the corporation–not in the properties themselves.
To take it a step further, there are public and private REITs.
Public REITs are bought and sold like stocks. The ease with which you can buy and sell, otherwise known as liquidity, is one of the most powerful benefits of REITs.
However, they’re often loaded with fees and you don’t get as many of the tax benefits as you would with direct ownership or investing in syndications/funds.
Private REITs, on the other hand, are created by certain companies. You’re also buying shares in that opportunity, but they’re not listed on the public markets. Still, they behave the same way, in that you can buy and sell directly from the companies.
In any case, you should always look at each individual REIT to know their terms for both purchase and exit.
6. Raise Money and Create Your Own Syndication
In this method, you’re no longer the “limited partner” I mentioned in the previous syndication option. Instead, you’re the general partner. This can be a great option if you’re confident in your ability to find, vet, and create deals.
If you decided to go this route, you’d find a deal, create a business plan for investors, raise money, purchase the property, distribute returns, and make all the decisions for how to renovate and eventually sell the property.
Obviously, this is a lot more work, but the payoff can definitely be worth it. If you’re doing this, you’re no longer in the business of simply investing, you’re now truly a real estate professional.
As we’ve seen, when it comes to investing in apartment buildings, there are so many different ways to get involved. The important thing is to consider them in the light of what works for you. Some ways are certainly more hands-on than others, while some carry more inherent risk.
Whatever you decide, real estate investing is one of the best wealth-building methods I’ve found, and apartment buildings are one of the best subsets of that. Taking that first leap can be scary, but in the end, it’s well worth it.
Do you have ownership in an apartment building? How did you go about it?
2 thoughts on “6 Ways to Invest in Apartment Buildings”
Location, location, location!!
Nice summary of the topic. I agree that it’s an intimidating thought to just “buy it yourself,” but this also offers the potential for the highest reward. I’m trying to make this leap myself and move up from duplexes to a small apartment building. It’s been a dizzying experience learning about commercial loans, surveys, environmental studies…. but it’s a good exercise. Hopefully it’ll end in the purchase of a great deal soon.