Anyone building a portfolio passive multi-families investments?

Question

Looking for people who have found success in passive multi-family investment. Why did you start? What mistakes have redirected your path forward? Where you ever active and turned passive? Looking for active investors to share their stories.

Todd Dexheimer · Answer

We have a lot of completely passive investors. A few have quit their jobs and are just investing in syndications full-time, but most have their own business or job and are investing in our syndications.

Most of our investors started investing because they're too busy to buy and manage their own properties, but we have a lot that also got tired of being a landlord and/or realized they could make similar returns without the headache.

Make sure you know your goals and find sponsors that you align with. Don't chase the shiny return, but instead focus on the fundamentals.

If you have specific questions, please ask.

Evan Polaski · Answer

I will offer the story of someone that found NOT success in passive multi-family.

Ultimately, passive investing is ideal for those that already have very high net worths and/or plan to maintain their high incomes for quite some time.

My "not success" is based on many factors. Buying at peak (my 21 and 22 investments are likely complete losses), buying on floating rate loans, misalignment of sponsor (acq fee resulted in about a 5x+ return to sponsor day one.  Put another way: $2mm co-invest into fund yielded about $12mm in acq fees for sponsor).

I know my experiences are very limited in the universe of all passive investment opportunities, so take with a grain of salt.  And all of these issues were disclosed up front, so I take responsibility for not being more prudent in my diligence.  The sponsor had a great track record prior to that, and held in very high regard in the community.  They got greedy when capital was flowing, and I got greedy thinking the COVID boom would only die off slightly.

Jeremy Horton · Answer

What do you mean by active vs passive?

Active as in managing the property? Rehabbing the property and managing subs? Actively finding deals or using a 3rd party marketing/acquisitions team?

Passive as in managing the property or passive as in syndication?

Evan Polaski · Answer

@Garret Rumbea, to be fair the money I am likely losing also underwrote conservatively, at the time.  It just wasn't conservative enough.  And while they underwrote conservatively, they didn't structure the deal conservatively, in hind sight.

They have a pref in their deals.  They have tiered waterfalls, so I keep more if they only perform marginally better than a pref.  But at the end of the day, the biggest alignment will come from having real money in the deal.

I understand the point of an acquisition fee.  But I no longer invest in groups that the acq fee takes out all of their co-investment.  There will always be a misalignment of interest, but using a deal I am currently working on as an example:Purchase Price: $6.8mmAcq Fee: 2%GP Co-invest: $390,000GP Co-invest net of fee: $254,000

So if the deal starts going sideways, I still have $254k to fight for.  But if I didn't have any money left in deal, and it starts going sideways, my only fight is for the carried interest, which can be profitable, but the further a deal slips, the less I have to fight for.  So, again, a sponsor needs to have real skin in the game, not the illusion of skin in the game.  And we can discuss reputational damage all day, but I can't take that to the bank.

Garret Rumbea · Answer

Ah got ya. You're saying if the acq fee offsets or exceeds the sponsor's own capital investment there's no real incentive left to protect the downside (besides their reputation). Totally get that. Agree with what you said about structure being just as important as underwriting. Yeah, numbers don't matter if the sponsor can walk away whole while LPs take the loss.

Garret Rumbea · Answer

Hey Lindsey good to meet you. Currently I'm on the active side with the goal to eventually be fully passive. Happy to connect if you'd like to chat some more

William Thompson · Answer

Great question — I’ve seen both sides of that journey through my clients. Many start active (flips, small multis) and move into passive multifamily to reclaim time and reduce management headaches. The biggest mistake I see? Jumping into syndications without fully understanding the tax side — especially how depreciation, K-1s, and exit strategies affect your after-tax return. Once that’s dialed in, passive investing can be a real wealth accelerator.

What kind of multifamily opportunities are you currently looking into — syndications, funds, or direct LP deals?

Jeffrey Butler · Answer

I have been part of a couple well known investment groups in Houston that align deal sponsors with investors.  Typically syndicators provide info on their best performing deals and project similar returns for the deals they are pitching.

I too had significant losses from projects within the last 5 years, floating rate debt in an era of unprecedented interest rate hikes was one factor, but not the only one.

Looking back in hindsight, I think it is fair to say the multifamily market in this time period betrayed a number of risks that even experienced operators were not capable of anticipating, much less passive investors who lack expertise.

Deal promoters are now saying THIS is the time to jump in, when assets have been foreclosed and are being purchased at a discount.  But I no longer place trust in the sales points or projections made by syndicators; I feel the industry as a whole needs more transparency which would help wary investors evaluate risks more thoroughly.

I would want to know general data on the percentages of deals within a given time period that actually succeeded and hit the projections made initially. What percentage missed projections but still brought commendable or reasonable returns?  What percentage ended up selling with a loss in equity for their investors, and how much were those losses?  And what percentage were foreclosed, or handed their investors a total loss?

That kind of general market information would be very useful in determining the potential risks of jumping into multifamily syndications with the notion of hitting 20% annual returns.  Likewise, it would be greatly helpful to see ALL the deals a sponsor has run, good bad and ugly, and how each of those fared compared to the overall market in that time period, and compared to other sponsors in those markets.   It would be helpful to know how existing projects are doing.  What cash on cash returns were anticipated?   Did they pay them consistently, or for just a little while, then have to reduce or eliminate them altogether?

That kind of information reflects the realities of multifamily investing, and it truly isn't something a potential investor is going to get objectively when a deal is being promoted.  Info conveyed by a deal sponsor should be viewed as part of a sales pitch designed to get you to jump on board.  It's the fox guarding the henhouse though.  I think the multifamily syndication market needs a means of objectively reporting on these kinds of metrics, with data on given markets, specific operators, and all of their projects.

One operator I am invested with is very good about sharing monthly metrics of all of their projects with investors and I commend them for that.  But all of that info remains confidential, not to be shared, and only truly accessible after you have already invested.  It is probably highly unlikely that a general clearing house of multifamily info could be created that tracks all of these metrics, but it would be a huge help to investors to be able to access objective detailed comparative data on multifamily operators.

For those considering investing in multifamily, here's the reality of my experience with a highly acclaimed blue chip operator with significant experience and impressive success prior to 2020.  I got into 4 deals with them between 2021 and 2023 and put 500k into these deals initially.  One of them provided cash on cash returns for a short time.  Another was foreclosed at a total loss, and another is slated to be sold in the coming year at a significant loss.  The other two required capital calls totaling 81k, and are still operating because of extraordinary rescue measures undertaken by the operator, with projected overall returns now significantly reduced from those presented when the deal was offered.  At best my investments of 581k with this operator are worth an estimated 350k at this moment.

Does that change anyone's perspective on the risks behind multifamily?  Another example is a beautiful new class A complex purchased from the builder, seemingly doing well but investors now discovering that water penetration is taking place through the stucco exterior, and it may require extensive repair as well as costs of potential litigation.

Of course the prospectus for all of these investments warn that such investments carry risk, including the possibility of losing 100% of one's investment.  It does indeed happen and newbie investors should learn as much as possible about how it can happen - the realities - before jumping in with pipe dreams of wealth ahead.  Perhaps the wisest admonition is to only invest $ you can afford to lose.

If anyone knows of a general database or a good source of information on the performance of different projects, or various multifamily operators, I hope you'll post here

Lindsey Jellig · Answer

Hi @Jeremy Horton exactly. Passive as in syndication or even less time spent with the property via investing in a platform like

https://www.mogul.club/

Basit Siddiqi · Answer

Real estate is never really passive.

You will either put the time upfront - such as analyzing the market, speaking with contractors, speaking with proprety management companies, etc.I think real estate can provide a better return than other investments(such as stocks, bonds, etc) and as such the extra time you are putting in should generate in a better return.

Anyone building a portfolio passive multi-families investments?

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