I have invested in over twenty-five multi-family syndication deals as a general partner. These single asset investments have been in a variety of markets with several long-term partner operators. I have also participated in self-storage and mobile home park investment funds as a syndicate so I understand how funds can benefit investors.
I would like to make a case for considering investing in a multi-family (MF) fund. As we enter into a period of greater economic uncertainty caused by the global pandemic, the aspects of investing in a single-asset play take on more risk as well. Especially if you lack the time, knowledge, and funds to build your own portfolio of single asset investments.
That risk can come from the specific property risk or a softening of a local market (think Orlando, Houston) during COVID-19, Disney World closing, low oil prices due to reduced demand, travel, etc. As we continue to monitor the economy, now may be a better time to consider investing in an MF investment fund than a single-asset investment.
3 things that I like about Multi-Family Investments:
- Diversification (Markets, Deal and Operator)
- Simplicity and Speed
- Return Characteristics Similar
One of the key tenets of any successful investment philosophy is diversification. That can come in three ways:
First, real estate is local. Although a national economic crisis often affects all markets, some markets will go down the least and come out faster than other markets that may go down harder and stay down longer.
Second, specific properties have their own risk. We had a new apartment being built across the street from one of our older assets. The new apartment owner had free rents for 1-2 months initially to lease it up fast. Our occupancy dropped 10% and took about 6 months to fully recover.
Third, a key partner could leave or have a serious health issue impacting management continuity or the property management team could lose its focus and adversely affect the property performance. A property manager as we have seen can make or break a project.
A fund can put you in a variety of markets, deals, and operators reducing the risk that any one property can sink your investment.
2. Simplicity and Speed
One decision, one fund versus ten decisions, ten individual asset holdings. It’s that simple. You get one K1 statement for your taxes each year instead of ten. You get one operational report instead of ten each month or quarter. One distribution instead of ten to track. You get my point.
For speed, I refer to the ability to diversify fast. Say you are an accredited investor who has $50,000 to $100,000 to invest in real estate assets annually. With minimum investments typically $50,000, it would take maybe five years or so to buy up to 8-10 individual properties to diversify risk. With a fund, you can accomplish that in the first year with one investment.
3. Similar Return Characteristics
There is a slight load with a fund because the fund manager has costs and must be rewarded. Legally, the fund manager cannot participate in any operator level fees or be compensated by the operators of the individual property for bringing capital. That said, reasonable fees and back end split adjustments with the investors by the fund sponsor are legal and can be created so that the investor experiences can be close to what a single asset cost might be without sacrificing returns too much. It is more expensive, but the return characteristics are in the ballpark with single-asset plays, and the many benefits I’ve highlighted here can outweigh the added cost, especially in this environment.
In summary, if you are wanting exposure to MF investments, just starting out investing in this area, lack time, don’t want the decision of monitoring/administration hassles, have minimal amounts to commit each year and/or are risk-averse, this might be a good time to consider a fund versus trying to sort out the best single asset play for you. Most funds do require you to be an accredited investor so if you meet that requirement that opens up this opportunity for consideration.