December 7, 2021

Investing in Multifamily Real Estate: A Complete Guide

If you want to invest in real estate, you may be thinking about buying single-family rentals, but have you considered multi-family investments? These real estate investments can be more complicated than single-family housing because they require more maintenance and management. However, if you have the time and resources to manage them, then multi-family real estate investing could be worth considering.

If you are looking to make money by investing in multifamily rental properties, here are some things you should know before you get started.

What is multifamily investing?

Multifamily investing is the practice of buying or selling commercial property that consists of multiple units located within a single building. Multifamily properties can be bought for investment purposes as well as for rental income. The most common types of multifamily investments include apartment buildings, condominiums, and hotel/motel complexes.

How do you evaluate multifamily investing?

The decision to buy multifamily real estate should be made within the context of broader short and long-term investment goals. Evaluating your goals and aligning them with will help in decidinge the type and location of your the multifamily investment. For example, those with a higher risk tolerance might be more open to investments in opportunistic deals like ground-up family construction in secondary or even tertiary markets. Those with a lower risk tolerance would be better served in stable and class-A core markets. Here, the risk would be minimal, but so will be the returns.

Another critical consideration is distinguishing between the operations of multifamily real estate – if the investor will manage by themselves or will they be hiring a third party operator to manage the deals and working. This decision depends upon the investor’s capacity and knowledge of the rental property. An experienced investor may prefer to self-manage, but new investors might need help to set their foot. Likewise, those with relatively little experience in the market would want to partner up with a sponsor when considering a value-added or ground-up project because such projects are complicated and can veer off track if not appropriately managed. 

What do I need to know about buying a multifamily home?

If you are considering multifamily properties as a real estate investment buying a multifamily deal, you have two options for investing. The first is to buy independently. Whereas fund managers will raise money for the purchase without clear intention on which property to invest in, they will raise the funds needed and then locate the investment property In either case, you will now be the subject of the rules and regulations of the Securities and Exchange Commission and, if you don’t comply, you could end up facing severe consequences. If you decide to invest through a security, it is a good idea to consult with an experienced securities attorney.

How to Buy Multifamily Real Estate Investments

When purchasing multifamily properties, there are several steps to take in order to invest smartly and protect your financial future. 

1. Determine your investment strategy and research the best real estate market.

If you are planning to invest in real estate, then you should first understand how much money you can afford to leverage and whether you want to include any business partners. Evaluate the best market to invest in to meet your short and long-term financial goals. 

2. Decide whether to finance or pay cash. 

If you qualify for financing, evaluate the different programs offered by lenders and choose the right lender based on your needs and requirements. 

3. Identify the investment property and negotiate the purchase price.

Once you have decided where to invest, identify the property and determine its current condition. You will also need to find out what improvements are required to make the property suitable for tenants.

4. Sign the purchase agreement and send the earnest money.

After all the paperwork has been signed, you’ll need to deposit some money into escrow to secure your rights to the property. This amount will be returned once the seller completes the work specified in the contract. 

5. Conduct your due diligence. 

Now that you’ve purchased the property, you’ll need to conduct thorough inspections to ensure everything is in order. Make sure the building meets code requirements and that the property is free from defects.

6. Organize financing. 

Organize any funding offerings and work through debt financing with your lender.

7. Begin generating passive income. 

Once you’re done with the above steps, you’ll be ready to start collecting rent and begin generating passive monthly income.

How to Draft a Purchase and Sale Agreement for a Multifamily Property.

There are two ways purchase agreements can be drafted on promulgated forms or with proprietary agreements. Each state has promulgated forms put out by its Real Estate Association and includes the basic terms needed to close a deal. The attorneys and brokers representing the transactions are experienced in these forms and will be able to explain the legal and financial conditions that are set forth in the documents.

Purchase agreements are drafted to protect the interests of both parties and are usually structured around these main components:

  • Title and description of the property;
  • Terms and conditions of the sale;
  • Pricing and financing, including closing costs;
  • Seller’s and buyer’s representations and warranties; 
  • Date of closing and date of possession;
  • Earnest money; and
  • Contingencies.

If your goal is to create a customized agreement, you should work with an attorney who specializes in drafting such agreements. This type of agreement allows flexibility for the buyer and seller to negotiate certain terms and conditions that are not provided in the standard form. For example, the purchase price can vary depending on the size of the property, how many units it contains, and what amenities are offered.

What can you do if a seller backs out of a contract?

It is important to understand that most sellers want to sell their property as quickly as possible. However, there are times when a seller decides to back out of the contract before the closing takes place. If this happens, the seller may have to pay the earnest money deposit back to the buyer. In some cases, they may have to return the money spent by the buyer during the purchase process, such as loan application and document drafting fees, and appraisal or surveying fees. 

All the documents required for the purchase of property fall under specific laws and regulations. As these regulations change so frequently, it is important to stay educated and informed in order to stay compliant.

Regulation D

Regulation D is an SEC regulation that was created to regulate investment companies and governs the private placement exemptions. It allows for capital to be raised through the sale of equity or debt securities without registering those securities with the SEC. The purpose of this exemption is to allow small businesses and entrepreneurs to raise capital from qualified institutional buyers and accredited investors. The rules governing Regulating D offerings have been revised twice since December 2020.

Crowdfunding

Crowdfunding is the practice of raising funds from a larger group of people rather than from just one individual or company. By using crowdfunding for real estate investments, investors can reach a broader audience and pool collective funds for their investment projects.

Regulation A

Regulation A is a federal law that allows for smaller companies to raise up to $1 million in unregistered equity or debt securities. The purpose of Regulation A is to provide liquidity to small business owners who need to raise capital but don’t meet the requirements of the Securities Act of 1933. Regulation A offers several advantages over other types of fundraising methods. These include lower minimums, no registration fees, and no restrictions on the number of shares sold.

Regulation D 506(C)

Regulation D 506 (C) is a new rule that will require all non-accredited investors to comply with the same disclosure and suitability standards applicable to accredited investors. Under Regulation D 506 (C), you can publicly advertise your offering to investors, so long as they are accredited.

Regulation D 506(B)

Regulation D 506 (b) allows you to raise money from both accredited and non-accredited investors. However, with 506 (b), you are unable to advertise publicly until after the offering has closed. After an investor invests, then appropriate Reg D notices must be filed with the SEC and states within 15 days of the investment.

The Bottom Line

If you want to invest in multifamily real estate, there are many different ways to do it. Each method comes with its own set of benefits and drawbacks. If you are interested in making an investment in multifamily real estate, we recommend that you research each option thoroughly before deciding which route to take.

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