10 Ways One Can Invest while Buying Multi-Family Properties

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Multifamily real estate investing has become a favorite choice of investors for a steady cash flow and a stable market. Many investors have found success with multifamily rental properties, which is expected to continue.

An additional driving force behind the popularity of multifamily investments is the fact that they have performed better than single-family homes during the various real estate downturns over the past few years. A good example is in 2012, when single-family homes experienced a drop of 11.2%, while multi-family homes showed only a 0.9% drop in value.

There are lots of advantages to investing in suburban multifamily housing. But how do you invest in multi-family homes? 

10 Ways for Investing in Multifamily Real Estate

  1. Bank Loan

The most common way to secure multifamily apartment investing is by getting a bank loan. The interest rate on this type of loan is lower than private lenders, but the down payment is slightly higher. The rate and the down payment vary among different banks. Always approach different banks before signing documents so that you can compare the offers.

  1. Homeowner Associations (HOAs)

Homeowner associations provide a way for people to invest in value added multifamily real estate that is often overlooked. If you are familiar with homeowners associations, you will know how prevalent they are. A homeowner association (HOA) is a type of property-owners association. A typical HOA is organized and run by a board of directors elected by the residents living within a community. 

Homeowner associations are run much like condominium associations. However, instead of paying fees to a corporation, fees are paid to an individual or other homeowners to pay for the upkeep of the properties. Homeowner associations can provide a low-risk, low-cost opportunity to invest in real estate. The fees are usually low; therefore, there is a lower cost of ownership compared to traditional multifamily investment.

  1. Federal Housing Administration (FHA) Loans

FHA loans are designed for first-time homebuyers who have not owned a home in the last three years. While they may have previously owned a home, their most recent income tax return must show that they have not owned a home in the last three years.

FHA loans are a good option for first-time buyers of multi family homes who, for whatever reason, have not been able to save for a sizeable down payment. FHA loans require a minimum down payment of 3.5%, but unlike conventional loans, the buyer does not have to pay closing costs. FHA loans also have a lower credit score requirement than traditional loans. Because the U.S. government backs the FHA, there are certain mortgage loan limits on what the FHA will insure.

If a person is self-employed and their income is not “verified” according to FHA standards, they may have to get a co-borrower who does have a steady income.

  1. Real Estate Syndication

Real estate syndications are effective for passive investors interested in multifamily real estate investing but don’t want to deal with the daily difficulties of property management. Syndications often include two or more parties, the first of which serves as the sponsor or syndicator and the others as passive investors.

The sponsor finds investors and is usually responsible for marketing the investment and managing the details of the syndication. For this, he charges a fee or commission. If you are looking to invest in real estate with only a limited amount of money. In that case, real estate syndications are a great way to play the market without worrying about finding a property that fits well within your budget, getting it fixed up and making sure it is rented out and maintained properly.

  1. Real Estate Investment Trusts (REITs)

REITs are companies that pool money together to purchase properties or mortgage loans. Investors select a REIT based on the type of properties or securities that they own and are interested in investing in. There are a plethora of such trusts available on public markets.

The trust is the legal entity that owns and buys real estate assets. It can also buy part of a real estate project and then operate it, acting as an underlying manager.

REITs are generally considered passive investments. They must distribute at least 90% of their taxable income to shareholders annually, keeping their growth relatively steady. In addition, they have historically beaten the market’s average returns in both bull and bear markets.

  1. Home Equity Line of Credit (HELOC)

HELOC enables investors to borrow money using the present equity they have in a piece of real estate. That money can be used for investing in multifamily real estate. It is the fastest way to make money with real estate.

For example, if you have $1 million worth of property, you can use your $1 million as collateral to get a $1 million line of credit. Since the lenders do not want their money tied up for a long time, the HELOC is typically for a shorter period and smaller amounts than mortgages.

  1. Debt Crowdfunding/Crowd Lending

Debt crowdfunding refers to a group of investors – the crowd – lending money to a company in exchange for interest-bearing repayments over time. It is a popular way for small companies to raise capital and individuals to invest in multifamily homes. Equity crowdfunding emerged out of the JOBS Act, which made it legal for the first time for startups to raise money from the general public through their websites.

By traditional standards, raising money through crowdfunded equity is still a relative novelty in that venture capital is a more common way for this type of funding to take place.

  1. Using Insurance to take a Loan

Investors can use their life insurance policies to borrow money to purchase multifamily real estate. Most of the time, this investment strategy is successful since multifamily real estate deals offer better returns.

There are three parts to using a whole life policy as an investment vehicle. The first is to take out a loan against the policy, the second is to use the loan proceeds for investing, and the third is to repay the loan once it is due.

  1. Property Exchange under Section 1031

An investor may sell an existing comparable property and reinvest the proceeds and gains for multifamily apartment investing under Section 1031 of the Internal Revenue Code.

The basis for the new property is the price of the relinquished property plus any capital improvements made to the old property. The property is then tax-deferred until sale. To qualify, a real estate investor must hold their current property for at least 24 months. In addition, the investor must not default on any mortgages or other real estate-related debts.

  1. 401K Plan / Simplified Employee Pension Plan

A Simplified Employee Pension plan is a Defined Contribution, better known as 401k. A 401k plan is for you, the employer, to contribute money into the employee’s Individual Retirement Account (IRA) that the employer and employee fund. This can be done in three ways – A one-time contribution, a fixed contribution per pay period or a percentage of pay. The money contributed to the employee’s IRA can be invested in multifamily real estate.

The bottom line is that multi-family properties can be a profitable investment opportunity. Investors just need to know what they’re getting into—it’s not quite as easy as buying a single-family home. But if one plans carefully, one should be able to reap the benefits without too many hassles. That’s how The Multifamily Mindset co-founder Tyler Deveraux’s net worth expanded! You will find similar experiences from other people in Multifamily Mindset reviews.

Thanks to the explosion of opportunities in the real estate and investment markets, there are more ways than ever for you to invest in a multi-family property. Explore the options above and determine which path is best for you. And whatever you choose, consider working with a professional to have someone knowledgeable when making these important decisions. 

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