Multifamily real estate is one of the best alternative asset classes available. For one thing, you get all the advantages of real estate investing with the added advantage of income diversification. If a single-family tenant moves out, that’s 100% of your investment that is idle and not earning a return for however long it is vacant. If you have a duplex and a tenant moves out, you still have the rental income of the second tenant. If a fourplex tenant moves out, that’s only 25% of your investment that isn’t performing.
While the investment is larger, the potential return is greater and as unlikely as it seems, it is easier to get a loan to purchase a multifamily real estate investment than it is to get a loan for a single-family real estate investment.
That said, here are eight ways a private investor can get in on a multifamily real estate deal.
8 Ways For Private Investors to Invest in Multifamily Real Estate
1. Cash – Cash always talks, and while you may not want to risk your liquid assets on your real estate investments, it is possible to purchase rental properties with cash or cash equivalents.
2. Trust – There are different types of trusts, and they make great vehicles for purchasing real estate with the added benefit of privacy.
3. Retirement Account – Whether you invest in multifamily real estate with your Roth IRA, a SEP-IRA, self-directed IRA, or self-directed Solo 401K, the idea is the same. You can use your IRA as a means of reinvesting and multiply your tax advantages.
4. Loan – Borrowing money for large investments like multifamily real estate makes perfect sense when you consider that optimal performance means paying off your loan in a reasonable amount of time while realizing long-term gains on your investment. Loans have to be paid back, but returns are keepers that can be reinvested for future earnings.
5. Real Estate Crowdfunding – Real estate crowdfunding allows you to invest in multifamily property investments without buying an entire property. You and several other investors pool your money to invest in a property sponsored by a developer, property rehab specialist, or rental property management company. There are generally two ways to accomplish this: 1) Through an equity arrangement where all investors own a percentage of the investment and receive returns on the back end when the property sells; and 2) Through a debt arrangement where you and all other investors loan the money that funds the project and receive dividends until the loan matures.
6. REIT – A REIT is a real estate investment trust that acts like a stock but consists solely of real estate investments. Some REITs focus on a single type of investment, such as multifamily or industrial, while others use diversification as a long-term strategy for maximizing returns. Either way, it’s a great vehicle for multifamily real estate investments and, thanks to modern technology, several REITs are available that automate the process and reduce investor fees.
7. 1031 Exchanges – 1031 exchanges allow investors to defer capital gains taxes by swapping a like-kind asset of lower value for one of higher value. If you already own real estate, you sell what you have, identify a property of greater value within the specified time period allowed by law, and make your purchase inside the exchange vehicle. This way, you grow your portfolio and defer your taxes at the same time.
8. Partnership – If you own raw land that isn’t earning you any returns, you can partner with a property developer to build a multifamily property on your land. Your returns can be structured by periodic dividends of rents paid by tenants, a flat fee of usage rights for the developer, or a combination of both.
Multifamily investments are hot right now, but like most other types of investments, the market moves in cycles. Don’t forget to do your due diligence.