Passive investors have much to consider when evaluating the multifamily investment opportunity. Among knowing and trusting the sponsor and ensuring alignment of interest, there is one more basic piece that everyone should consider and understand prior to making their passive investment.
That is understanding the suitability of the investment towards your needs. You see, there is an investment criteria that each passive and active investor should have. This criteria allows investors to quickly vet opportunities and rule out those that do not fit their desires. We wrote about how to develop and investment criteria in this earlier article, but aside from the specifics – returns, markets, etc. – there is more of basic appreciation for criteria in the sense of risk profile and the length of the investment.
Not all multifamily investment opportunities are created equally. Some are stabilized deals with limited value-add opportunities; others require heavy lifting to force appreciation and generate great returns for investors. Each flavor is different. One is less risk and reward; the other is more. Neither is incorrect, but it is important to understand where you are on this spectrum and ensure that the next investment aligns.
Length of Investment
It is very exciting to invest in real estate. Making an investment in a great opportunity is a wonderful feeling, but it is important to ensure that the funds you used are what i refer to as “long-term money.” That is, there is no expectation of needing these funds in the next year or two. Multifamily real estate provides rewards to those who can invest for the period of three to seven years. Often times, such as in this very active market, investors are pleasantly surprised to be able to meet their targets by selling their investment in one or two years, but this should not be counted upon. Passive investors should plan for their investment to be put to work for years and should not invest with funds needed in the short term.
If you are preparing to make your first passive investment in the multifamily asset class, make sure to consider the above. If you have not downloaded our free Passive Investor Startup Guide, you can get it here!
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Rodney Robinson II