Top 16 Multifamily and Syndicating Questions for Investors

Multifamily Investing

There are hundreds of questions to ask when investing in multifamily real estate. However, I am asked the same 16 questions often and wanted to make them available for reference for anyone looking to either become a limited partner/passive investor or just starting out looking for a property.

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Q: Why Multifamily investing?

A: There is a massive demand for apartments in the United States. There is a chronic shortage of quality apartments in multiple metros, and there is no sign of catching up. Also, there are so many benefits multifamily investors can enjoy: positive cash flow, appreciation, depreciation, principal reduction, and leverage to buy assets.

Q: What makes a market ideal for investing? Or rather, how do I decide which cities to invest for passive income and security?

·     Population growth – this shows people are interested in living in a particular area, and it takes time for people to settle down and buy a house.

·     Job growth – this is huge! Where there are jobs, people will need housing. And especially in cities, housing can be expensive, so apartments can be a great place to live for families.

·     Landlord Friendly – States in the Midwest, Texas, and Southeast have landlord-friendly laws. When it comes to the point of having to evict, I would prefer to own in these states.

·     Multiple Industries – When there are different industries in a particular area, if one sector suffers a bit, the other sectors can often absorb that labor force. Most cities in the South can do this. An example of a market that cannot support this is Midland, Texas. The entire town of Midland, Texas, runs on the oil and gas industry. If oil falls too low, the town suffers immensely. I cannot risk my money or my investors’ money on such a situation happening.

·     City Investments – Is the city currently updating buildings or building new ones? Is new public infrastructure being added? This is often a good sign of a substantial tax basis.

·     Developer Investments – This is an even more powerful sign of a healthy economy. When private businesses are building a commercial and residential property, this shows a lack of supply that needs to be met and the expansion of the metro.

Q: What are the potential tax savings to investors? (Tip: Check with your CPA for your individual case.)

·      Depreciation passed through to investors

·     Cost segregation allows us to accelerate depreciation even faster

·      You will receive a K-1 from the partnership every year

·      Bonus Depreciation (even better with new tax law)

·      Bonus depreciation is a valuable tax-savings tool. It allows you to take an immediate first-year deduction on the purchase of eligible business property, in addition to other depreciation.

Q: Why passively invest in multifamily apartments?

·      You are NOT responsible for the day-to-day management of the property

·      While nothing is recession-proof, apartments tend to do well despite drops in the economy.

·      Occupied units are increasing causing a higher demand for apartments

·      By investing in rental apartments, we are providing a needed service to provide affordable shelter, to encourage us to do this, the US government has several incentives built into the tax code

·      Talk to your CPA. I am not giving tax advice. Still, when passively investing, you can take advantage of depreciation, rental income (no payroll taxes), have equity on the property, etc.

Q: What is NOI?

A: NOI is Net Operating Income or NOI = Net Income – Expenses (excludes interest and principle, etc.)

Q. What is Cap Rate?

A: CAP Rate = measures a property’s rate of return for a single year without taking into account debt on the asset. It varies based on the market(city or town) for different areas.

Q: How is Cap Rate used?

A: Cap Rate is used along with NOI to calculate the property value. Remember, we are buying a business, not a single-family home. Multifamily does not use comps like residential real estate. The equation is: NOI/Cap Rate% = Value of Property.

Q: What are the roles of the General Partner/Sponsor?

·     Build the correct team: included partnership team, management team, insurance, etc

·     Find and analyze deals

·     Submit LOI’s and get the property under negotiates contract

·     Pay fees prior to closing

·     Raise money

·     Invests

·     Loan or finance deal (not often needed)

·     Creates Profit and Loss statements

·     Hire Property Tax Consultants

Q: What are the roles of Limited Partners/Passive Investors?

·     Simply to Invests

Q: What paperwork is involved when we have a property under contract?

A: As a partner, we put together a slide deck with the property numbers and calculations as well as have our securities attorney draft a private placement memorandum (PPM) for potential investors to review. We also include data about the location, rental, and renovation information in the slide deck as well.

Q: How much is the typical minimum investment?

A: Typical minimum investments vary, but in most cases, it is between $50,000 and $100,000.

Q: When do investors get paid?

A: Most investments pay distributions quarterly (every three months), but this can vary based on the scope of the project. For example, some extensive renovation projects may delay distributions until the renovation phase is partially complete. Usually, after 12 months from closing on the property, investors are getting paid while earning interest the entire time. Investors can also get paid after a refinance or disposition (sale) of the investment asset.

Q: Can I use my 401k or IRA to invest?

A: Yes. Again, check with your tax advisor for specifics. Many investors use Self-Directed IRAs and qualified retirement plans (QRPs) to invest. Some investors can convert old 401ks to a Self-Directed IRA or QRP and invest in syndications.

Q: What is a “sophisticated” investor?

A: Sophisticated Investors have enough investing experience to understand the risks associated with investing. While they may not be an accredited investor, they can still understand an investment opportunity and associated risks. Some investments are open to sophisticated and accredited investors.

Q: What is an “accredited” investor?

A: Some investments are open to ONLY accredited investors. To be an Accredited Investors, you must earn $200k per year individually, $300k per year jointly with a spouse, or have a net worth of over $1,000,000 (not including primary residence).

Q: Do you accept foreign investments?

A: Yes, on a case by case basis, and as long as US Securities Law is satisfied. Please contact me if you need additional information here.


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