How to Invest my Capital

Question

I have a little over 200k that I would like to invest in a multi-family unit/apartment. I have been pondering on whats the best way to go about this. I own a piece of land that I could have maybe a 12 unit apartment built on, but with the price of wood so high, I'm not sure if that's a great idea. When looking at some multi-family homes that are on the market already, they all just seem so run down that it would just be a huge hassle to deal with, let alone attract any decent tenants.

Not sure what the best option is and I'm open to other options.

Spencer Gray · Answer

Hi @Sterling Clifton without knowing your personal situation, goals or objectives I would suggest learning about real estate syndication and see if it might make sense for you. If it does, it could make sense to split your $200k into 4 $50k investments into 4 different multifamily properties with an experienced syndicator/operator. That's just what I would do, it might not make sense for you and this is not legal or financial advice.

Badri Malynur · Answer

Agreed with comments before that you should first decide if you want to be an active investor or passive investor. Today for even as little as $100K you can build a diversified real estate portfolio that  spans multiple states and includes multiple asset classes  including multifamily, student housing, assisted living, self storage and retail. You can still pick and choose individual deals. Please reach out directly if you would like to understand this model more.

Taylor L. · Answer

Agreed with Spencer that it comes down to your goals. Many investors who do not want to be active choose syndications because someone else handles the active role.

Regarding your 12 acre situation, don't let the recent price of lumber alone keep you out of it.

For one, those prices have started to come back down.

For two, the cost of any one input should not drive your decision to move forward. The potential profitability of the overall venture and if it fits your goals should.

Chris Levarek · Answer

@R. Feltman A good method is search syndication sponsor or the word syndication in BiggerPockets. You'll find the same names pop up when syndication is discussed. Once you have a few names, review their BP profiles to see deals done. Do some due diligence on their website or social media, have a call and see what kind of opportunities they offer. Check out bbb.org or google reviews.

Most syndications are 506b, an SEC regulated offering, which are not advertised. So you need to first form the relationship, before seeing the deal. If you are accredited, you can browse open offerings that are advertised. I see these all the time on my social media feeds, but again, just have to connect with the groups to be party to the offering list.

Perhaps check out the group LeftFieldInvestors in Google they've put together quite a good list of resources for sponsors, investing in syndications and more.

Ben S. · Answer

I think the answer depends on how active (or not) you want to be.  If you don't mind taking an active "Sponsor" role, you could use your $200,000 as the basis for a syndication, meaning you would raise additional equity from investors and leverage that alongside your $200,000 to do a larger deal.  We typically structure our syndications as "90/10" deals, meaning we raise 90% of the required equity from investors and contribute 10% of our own capital.  In this case, if you did a 90/10 structure, in theory, you could look to do a deal that requires $2,000,000 in equity, which means you would have to raise $1,800,000 from investors.

If you were to do this (again, in theory) if you took out a 75% LTV loan you could acquire an asset for $8,000,000.  If this is your first real estate venture, I would suggest that might be a bit aggressive and that you should look at a more balanced equity structure (i.e. 50/50) and purchase a smaller asset.

In either case, your role as the "Sponsor" would entitle you to earn some fees and a "promote" for your work in making a successful project.  The "promote" just means that after your investors are paid a pre-determined return, you would receive something more than your proportional share of cash flow thereafter.

As someone else pointed out above, if you aren't an experienced investor and desire a more passive investment, you could invest as a limited partner (i.e. part of the 90%) in someone else's deal.  Your returns will be lower, but it would result in completely passive income.

My apologies for the long and confusing answer.  I hope this helps.

Todd Dexheimer · Answer

Lumber prices are way down now, so maybe building is an option, but if a run down property seems like a lot of work to fix up, then developing a property will certainly be too much work.

If you are looking for a deal to own on your own, then buy one of the run down buildings, fix it up and rent it to good tenants.

If you are looking for a more passive investment, then find an investment company and invest passively with them. This will require work up front to vet the company, but will be completely passive after that, while you collect the money, as they do the work.

Greg Kasmer · Answer

Sterling - I think you have plenty of options at your disposal to get involved with a multi-family property. There is probably not a "right" or "wrong" way to go about it, but the best that is best for you based on how much you want to be involved in the multi-family and your goals.

Some ideas:

- Partner up with someone locally in your area to purchase a multifamily actively together. Together you can form a partnership or JV to work on the deal together and split the tasks/responsibilities. However, make sure you have matching skill sets that compliment each other... and the same/similar goals.

- Invest some/all of your funds as a passive investor in someone else's deal. This will get your exposure to the process and also allow you to see how others actively invest. Additionally, you should be able to ask questions of the active investors/operators.

- If you invest some of your funds as a passive investor you may be more apt to invest actively once you know the process and have more confidence.

Hopefully this gives you some ideas. Good luck!

Greg

K4 Real Estate LLC

Jack Martin · Answer

@Sterling Clifton good perspective offered in this thread above. If you are seeking to be an active investor wherein you are finding the finding deals, performing all the tasks required before and after closing, overseeing day-to-day management and capital improvements, and managing the overall performance of the investment, then you can either use your 200k to do a smaller deal yourself, or form a JV with like minded folks like you that also want to be active investors and have the appropriate skills to accent yours.

If you are seeking freedom of time and want to leverage someone else's experience, then a passive investment with an experienced sponsor may be a better fit. However, before you jump in, it will be good to be aware of the benefits and risks that will be present. Passive investing with an experienced sponsor can result in many benefits, including:

• Access to deals: A good sponsor can find deals that the general public never even knows about.
• Lower required investment: Rather than having to fund the purchase of a whole property yourself, most passive investments allow you to invest a smaller portion.
• Low time commitment: The sponsor handles all the day-to-day work.
• Lower risk: Investors can leverage the sponsor's experience to avoid costly mistakes.
• Economy of Scale: Sponsors tend to buy larger properties. Larger properties create economies of scale that can result in higher and more stable cash flow.
• Returns: It's not uncommon for investors to make a better return being passive than they would have if they took the plunge themselves.
• Direct access: Unlike traditional investments, passive real estate investment offers direct communication with the people responsible for the performance of your investment and the properties themselves.
• Tax benefits: Investors can receive the same tax advantages that come with ownership of real estate, such as depreciation. Keep in mind, some asset classes are more tax efficient than others. (such as my personal favorite, mobile home parks)
• Retirement-account friendly: Passive investments can be a great fit for retirement accounts because they are hands off and don't violate rules related to prohibited transactions and self-dealing.
• Fund Diversification: Similar to the way a mutual fund behaves, a real estate fund diversifies the investment across a group of properties instead of a single property. This can result in reduced risk and blended performance across all the properties in the fund, and can also create the opportunity for compounding returns by reinvesting cash flow distributions back into the fund.

With all that said, passive investors are exposed to both deal risk and sponsor risk. Deal risk can be mitigated by choosing a sponsor who has a track record of good deals, and can be further mitigated by investing in a fund. Sponsor risk can be mitigated by doing a good job of vetting and (IMHO) is the most important step in evaluating any passive investment.

As you connect with sponsors that resonate with you, take the time to develop a relationship with them. Trusting the sponsor will be paramount to you sleeping at night, and I can't stress that enough. It does no good to place capital with a sponsor who has an attractive deal to find out later they can't be trusted. Making sense of the deal and understanding their track record is important, of course, but I believe you should develop TRUST before you invest. Developing that trust with someone you don't know may seem like a challenge, but if you approach it correctly, you should be able to achieve a pretty solid foundation before you engage.

One way to approach this is to look for investments with professional administration. In that environment, most of a passive investor’s concerns related to honesty, transparency, accuracy, and timeliness are managed by the administrator who is a neutral party. It’s like having a referee that is overseeing the investment to ensure that the sponsor continues to do what they promised.

If that is not available, another approach is to talk to investors who have had an experience with the sponsor already. If the sponsor is willing to connect you, there is nothing that replaces a conversation with someone who has already built that trust with the sponsor over time.

Also, be careful not to get blinded by just the projected returns. Your overall experience in a passive investment involves much more than the returns, so when you find a sponsor you like, do yourself a favor and get clear on what your experience will be like AFTER you have invested.

If you are able to connect with existing investors, ask them how their overall experience has been? How accessible is the sponsor? If you have a concern, are you able to talk to them? Do they return your calls? Are they transparent? Even when they run into a problem? Does the sponsor have a communication plan? How often will you receive reporting? How are they delivered? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? In the sponsor's history, have the reporting and distributions been on time?

If the investment has professional administration, you will have access to the answers to those questions, but also much deeper vetting of the sponsor that will include personal background checks covering things like bankruptcy, judgements, litigation, criminal history, and other red flags related to a sponsor that you would want to avoid, plus other items that investors rarely consider like ensuring that the properties are actually titled correctly, property taxes are paid, and insurance is current.

The purpose of investing passively is to leverage a sponsor's time, expertise, and ability to source great deals, but your overall experience will be driven by the answers to all the questions above, so make sure to cover that in your vetting process. Otherwise, any return you might make simply will not be worth it.

All the best,

Jack

Paul Moore · Answer

@R. Feltman and @Sterling Clifton I’d recommend you join and search The Real Estate Crowdfunding Review to search for carefully reviewed syndication deals and funds.  You have to go through a process to join but they have great info from others who have actually invested.

Sterling, you might want to find a partner who would actually build the apartments on your land and you contribute the land and $100,000 for up to $200,000.  Then you let them mentor you as they do the asset and property so you get to learn the business along the way. When they refinance, you can hopefully take a significant chunk out and go do it yourself next time.And if the land isn’t best suited for a multi family, you could also consider using your funds to do an RV park and you might be able to own it outright. There are not as many moving parts in construction and operation. Happy investing!

Jason Mileshko · Answer

Depends on what you want out of life. Do you want to be an active investor who is working to grow their business and portfolio similar to an entrepreneur or do you want to just make passive income and do other things?

How to Invest my Capital

Most Popular Reply