Updated: Apr 24, 2020
Commercial multifamily investing is one of many strategies to invest in real estate. Purchasing a residential rental property is another common and popular method of investing in real estate. But which is better and why? Well the answer is it’s entirely dependent on you, the investor. There is no universal answer that applies across the board as to which is better. However there are tangible and intangible advantages and disadvantages of each. This article will focus primarily on the intangible side of this choice - those things that cannot be quantified. You will learn what factors an investor will need to evaluate when determining which investment is right for you.
The whole goal of any investment is to earn a return. By taking part in an investment we are saying, ‘I want to not just earn income actively through my job (labor), but I also want to earn income passively through my investments (capital). If the goal of life is to spend the most amount of time we can doing the things we love, it makes sense to not only be earning as much as we can with our time, but also earn as much as we can with our capital. So choosing an asset to place our capital is perhaps one of the most important life decisions we can make.
Time IS in fact money, the more time we have, the more ability we have to earn income. Conversely, the more money we have, the greater ability we have to ‘purchase time’ through passive investments.
We can trade our earned income through an employer into passive income through an investment.
There are some very stark differences between what it means to invest in a rental property, and what it means to invest in commercial multifamily:
Future Growth Prospects
Time Investment: Without a doubt the most important factor when it comes to evaluating our big question is Time. Purchasing a rental property requires you to spend time. The more time you spend, the higher likelihood the investment will pay off. Searching for a property, moving through escrow, closing the deal, renovating the home making it rent to rent, marketing your rental to attract renters all take significant amounts of time. And that all comes before you’ve found a renter. Once you’ve secured a tenant, ongoing property management, rent collection, repairs & capital expenditure projects like a new roof all require additional amounts of time. Commercial multifamily investments on the other hand are passive investments. Once you wire your investment, your work is done. Distributions are wired back to you every month, monthly updates are provided to you regarding the project and the general partnership is available for any questions you might have.
Financial Risk: Because of the legal structure in a commercial multifamily investment, a limited partner is not liable for the loan. When purchasing a rental property, the owner must secure financing by signing a mortgage. This is a good thing in that it allows the investor to utilize leverage - but leverage works both ways. If that property value drops, the owner is liable for the entire value of the loan. A great example of this is a short sale. In a short sale, a rental property owner is on the hook not only for his down payment, but also for any equity loss stemming from the difference between the original sale price and the short sale price. In other words you are liable for the entire value of the loan. As a limited partner in a commercial multifamily investment, you are on the hook only for your investment.
Take a 500k home purchased with a 50k down payment for example. You are liable for that entire 450k mortgage. Should the market crash as it did in 2008, and the home value drops beyond 450k down to say 400k, you're on the hook for not only your 50k down payment, but also the 50k in value loss.
Not so with commercial multifamily. A 50k investment into a commercial multifamily project can only lose as much as you invest in the absolute worst case scenario, or 50k.
With Commercial Multifamily, you are not responsible for any loss beyond your initial investment.
Tax Efficiency: Most people are aware of the tax benefits of an investment in real estate. But are you aware of the extent to which the general partnership (GP) in a commercial multifamily investment goes to take advantage of tax incentives? For starters we hire commercial real estate tax accountants certified to perform cost segregation studies of our assets. This allows us to write off a tremendous amount of depreciation above and beyond a typical real estate depreciation write-off through bonus and accelerated depreciation. The general partnership (GP) will also hire real estate tax attorneys whose sole job it is to challenge local government on property tax rates. These tools are available to the rental property investor, but it often does not make financial sense for the attorney to take these small jobs on.
At the end of every year, a limited partner (LP) is provided with a K-1 tax statement which is provided to your CPA. These K-1 tax statements are basically your share of tax deductions for the entire project and are used to offset income received through your investments.
Value-Add: Some people flip houses to take advantage of the biggest returns available in real estate - Adding Value. Commercial multifamily value-add investments do the same thing, just on a much larger scale. In a sense, we flip apartment buildings. A lot of money can be made flipping houses, even more money can be made flipping apartment buildings. The reason for that is a concept called economies of scale. Economies of scale is fancy words for the cost savings that come from the efficiencies of buying in bulk and repeating a process many times. By the time the project’s general contracting crew gets to the 10th unit of a 400 unit complex of a value-add business plan, they’ve got it down to a science. Replacing drywall, installing new vinyl flooring, resurfacing cabinets and replacing appliances is like blitzkrieg. Those time savings translate into lower bids on a per unit basis when compared to a rental property. That goes for simple materials purchases too - it's cheaper to buy 400 faucet fixtures on a per unit basis compared to 1 for a rental property. Those cost savings translate to higher returns for investors.
Active Management: How much time are you willing to spend on your rental property? Every decision comes down to you and this goes hand in hand with your time investment. But consider another side to this: Experience level. Now granted anyone can learn the best and most cost effective way to turn a property around or perform ongoing property management. The property management team, construction management team along with the general partnership however have decades of experience in doing just that. Leveraging experience is one way a real estate investor can ensure a higher return.
Future Growth Prospects: The writing is on the wall. Nobody has a crystal ball and can predict the future. However what we can do is plot data and analyze trends with the hopes of taking a glimpse of where things are headed. And for this one, it’s pretty clear: Single family home prices in metropolitan areas are skyrocketing. It is no longer affordable for most of the working class and an entire generation of millennials to purchase a single family home. If they can afford a home, condominiums are the first choice. Short of that, we are seeing an entire generation of young people staying in apartments as a long term answer to housing. And honestly, why not? New commercial multifamily buildings are packed with amenities: Pools, spas, fitness centers, shared kitchen and BBQ facilities, ride sharing, off street parking, valet parking, business centers, 24hr concierge desks, child-care services...you name it. This bodes extremely well for the long term growth prospects of commercial multifamily.
There are many strategies to investing in real estate, and in the end it is a personal choice. Time Investment, Financial Risk, Tax efficiency, Value-Add, Active Management and Future Growth Prospects are some factors to evaluate when choosing a real estate investment strategy. There are two ways to earn income, actively through employment and passively through capital investment. Choosing an asset to invest in, is perhaps one of the most important decisions you can make.
Invest with fyre CAPITAL
fyre CAPITAL is a commercial multifamily investment firm. We purchase and/or partner in 150-600 unit, value-add apartment communities in fast-growing Tier 1 & 2 U.S. markets. Together with our strategic partners, fyre CAPITAL represents over 500 Million Dollars of successful real estate acquisitions. Our developers, sponsors and capital partners have amassed a network of over 1,500 unique investors. We provide new opportunities to invest in projects targeting a 14%-21% Internal Rate of Return . If you would like to join us on our next project, your first step is to Submit an Interest Card. We look forward to partnering with you.