The Top Three Ways to Build Wealth Through Multifamily Investing

Author: Leslie Awasom

Published on: 26 August 2020

There are many ways to build wealth and achieve financial freedom. Real estate investing is one of these many methods. According to a Forbes magazine article “How the world’s billionaires got so rich”, real estate investing was one of the top 3 industries that have produced the most billionaires. The real estate industry has been a great source of wealth for many generations prior, and that hasn’t changed in today’s reality. For new and seasoned investors alike, multifamily investing is an excellent addition to your portfolio, and multifamily investing is a great way to build generational wealth.

What is multifamily investing?

“Multifamily” simply means multiple families dwelling in one building, a/k/a apartment buildings. Individuals, families and organizations can build generational wealth by investing in multifamily properties. There are many benefits to investing in multifamily properties, especially considering:

  • Younger people/millenials are buying homes later or foregoing home-ownership altogether;
  • Older homeowners/baby boomers are downsizing, often to 1 and 2 bedroom apartments; and
  • Home ownership is often out of reach for many working class American families.

How can I invest in multifamily properties?

There are many ways to invest in multifamily properties. The three that we will discuss here are “active investing”, “passive investing” and “debt investing”. An active investor goes out, sources  great deals and purchases them. A passive investor provides funds towards the purchase of the property and receives an ownership share of the building. Finally, a debt investor provides the funds necessary for the purchase of a building as a loan over a defined period of time and receives interest payments. 

What are my responsibilities as an active investor?

As an active investor, you are responsible for identifying the right market and suitable properties in which you would like to invest. The active investor also has to build the team necessary for the management of these big assets. In a syndication model, the active investor:

  • finds the deal, 
  • evaluates all aspects of the deal to make sure it is an income producing asset,
  • develop a business plan tailored to that particular property, 
  • builds the team needed to execute the business, 
  • And manages the asset until exit (when the asset, or property, is sold). 

Active investors are also responsible for making sure investors receive their promised returns. The active investor typically owns 20-40% of the deal, and they receive a share of the cash flow from the building and any profits on exit based on their ownership share. 

What are my responsibilities as a passive investor?

The passive investor is not involved in the day to day management of the asset. Being a passive investor is ideal for busy professionals who are looking for stable alternative methods of investing. Typically, passive investing works for Investors who like the stability of real estate but do not have the time to deal with the day to day management of big real estate assets. The passive investor contributes money towards the purchase of these assets and receives a share of the entity which owns the asset. As the income of the property grows, so does your investment. That’s because the value of these properties is based on income. As a passive investor, it is not usual to earn 10-20% annual returns on your investment. In addition, you also receive multiple tax benefits derived from cost segregation studies and bonus depreciation. This can help erase any tax liabilities from all your passive real estate income.

What is debt investing?

Other savvy investors build and maintain generational wealth by being debt investors in multifamily properties. Many savvy investors love multifamily assets because of the stability they can provide. As a debt investor, you provide anywhere from 60 – 90% of the funds necessary for the purchase of multifamily assets as a loan, and receive an interest on the funds provided. One huge advantage of being a debt investor is you occupy the first position on the capital stack, which means if something were to go wrong with the property, you are in the first position to get your money back. This is usually done through family offices which are in charge of managing the wealth of wealthy families. Family offices love this type of investing because it is a good hedge against inflation as rent goes up with inflation, and the interest they receive helps their money grow.

Depending on what your goals are and where you are on your financial journey, you can use either one of these methods to grow and maintain generational wealth. As the economy changes due to the COVID-19 pandemic, many other real estate classes are feeling the pinch but multifamily investing still remains strong. This is consistent with what was seen in the 2008 recession as well. If you are looking for a great way to grow your wealth, multifamily investing is definitely one you should consider. A word of caution however: it takes time to build generational wealth. Multifamily investing is not a get rich quick scheme, so don’t expect to become a billionaire after your first investment. But due diligence coupled with hard work over time will produce exciting results.

Would you like to learn more about multifamily investing? Check out our free multifamily investing resources here.