After deciding that you want to become a multifamily investor, the next decision you have to make is how you are going to actually invest in multifamily properties. The 3 most common ways of investing are: Independent rental owner, lead partner/general partner, or limited partner. Each of these ways of investing has its advantages and disadvantages. Depending on your current personal balance sheet and current job, will determine which of these ways will be the most beneficial for you.
INDEPENDENT RENTAL OWNER: INDIVIDUAL WITH STRONG BALANCE SHEET LOOKING TO OWN THEIR OWN PROPERTIES WITHOUT PARTNERS
Example: Doctor purchases 25 unit property for $1MM. He invests $250K as a down payment and takes out a recourse bank loan for $750K. He must personally sign recourse for the loan. Due to the small number of units, he either self manages the property or pays a high management fee of 7%-10% of income.
LEAD INVESTOR/GENERAL PARTNER: INDIVIDUAL WHO PUTS DEALS TOGETHER BY LEVERAGING OTHER PEOPLE’S MONEY AND 3RD PARTY PROPERTY MANAGEMENT TO BUY LARGER MULTIFAMILY PROPERTIES
Example: Lead investor acquires a 100 unit multifamily property for $5MM. Lead investor signs a non-recourse note for $4MM and raises the down payment of $1MM from limited partners. Lead investor might earn a 1% acquisition fee and/or 10% sponsorship equity for putting the deal together.
LIMITED PARTNERS: INDIVIDUAL LOOKING FOR TRULY PASSIVE INCOME AT A SLIGHTLY LOWER RETURN WITH DIVERSIFICATION ACROSS MULTIPLE PROPERTIES, GENERAL PARTNERS AND MARKETS
Example: Retired corporate executive has $1MM to invest in real estate. He invests $50K across 20 separate deals with 5 general partners in 4 different markets: Dallas, Houston, Austin and San Antonio.
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