In general, multifamily real estate is any property other than a single family home or single dwelling property. Anything from a duplex to a 500 unit apartment building can count under the "multifamily real estate" banner.
When we look at investing in multifamily properties, we are looking for anything with 20 units or more. While there are several reasons for this, the main reason has to do with how those properties are valued at the time of sale. If you were selling a duplex, that property would be valued based off the recently sold comparable properties in the area. In a time of recession or market reset, this can cause the value of your property to drop and you may lose money on your investment.
With a property containing over 20 units, the property is valued based on a simple set of calculations shown below. In this example, our property has 100 units and each one generates $100 of profit per month.
Step 1 - 100 units * $100 rent increase per unit = $10,000 increased revenue
Step 2 - $10,000 revenue increase * 12 months in a year = $120,000 annual increase in revenue
Step 3 - $120,000 annual revenue increase * 10x multiplier = $1,200,000 is the additional equity we have added to the property through improvements and raising rent to market levels
If we had purchased this property for 1,000,000 three years prior, we would be able to sell the property for 2,200,000 after only three years of growth. That type of value growth is possible because the value is based on the price that units rent for. This is much more controllable than a duplex that is valued based on what other people have sold their properties for.
Investing in these types of large properties does require a large outlay of cash in many cases. Because of this, there are both passive and active ways to be involved and invested in one of these deals.
These deals are often referred to as a "syndication", which allows you to invest and put up a portion of the needed funds to purchase the property. This would put you into the LP (limited partner) side of the investment. You will own a portion of the equity and receive payments as well as a portion of the equity upon the sale of the property. Being a LP allows you to be passively invested and receive returns based on a pre-determined percentage that is outlined in the documents you sign during the investing process. There are several advantages to investing this way, but one upside is as a passive investor you are not spending any time working on managing or operating the property. This allows you to let your money work and bring you returns with no ongoing energy put into the process.
The other side of the deal is handled by a GP (general partner). This could be a single person but is often a team of people who find a deal with money making potential, arrange the purchase price with the seller and broker and locate and secure funding to purchase the property. They will be responsible for handling the property and guiding it into increased value. Being on the GP team makes you an active investor. Here at Desert Lily Properties, we handle the GP side of the equation and allow our investors to enjoy the benefits of passive investing as limited partners.
Interested in learning more about how to become a limited partner? Contact us today and we can answer all of your questions.
We welcome inquiries from investors seeking multifamily investment opportunities.