There are many advantages to putting your money in multifamily syndications, but every investment comes with risk. Discover the risks of investing in multifamily syndications – and what you can do to overcome them.
What are the risks of investing in multifamily syndication deals? What can you do as a passive investor to keep your money as safe as possible?
Watch the video below to find out the answers (or keep on reading).
Market Cycles of Multifamily Syndications
Like any investment, multifamily investments are affected by market cycles. Yes, apartment buildings have historically performed much better than residential real estate or the stock market during a downturn (see last week’s post for details [hyperlink to article]). But multifamily is not immune to market cycles.
The good news is, you can avoid cyclical markets by investing in the right locations. Stay away from the west coast and New England, where strong up and down cycles are likely to impact your investment. Do your homework and choose multifamily real estate in stable markets like Dallas, Memphis or Atlanta.
Vicious Cycle
A related issue to be aware of is overbuilding. In the current climate, construction has gotten so expensive that developers are only putting up luxury apartments. This allows them to charge the very high rents necessary to recoup their costs and still make a profit.
But the number of people who can afford Class A rent is limited. And research by Marcus & Millichap shows us that steep prices are already causing vacancies to rise in the luxury market.
Should we encounter a full-on economic downturn, more and more people will flee Class A for more affordable options. That's why we focus on Class B and C properties as a much safer, more recession-proof option.
Not-So-Smooth Operator
Having the right team in place to run a property is also crucial to the performance of multifamily. If you are dealing with an inexperienced or incompetent operator, they are liable to make mistakes. Mistakes that can cost you a lot of money.
To mitigate the risk, ensure that the sponsor has a strong track record.:
- Do they have tenant screening systems in place?
- What is their policy around routine maintenance and inspections?
- How well do they communicate with renters and ownership?
- How good is their property management company?
The property management team plays a key role in finding the right tenants and maintaining the property. When they do their job right, you earn consistent cash flow. And this contributes to the ultimate success of your investment.
Law and Order
Commercial real estate investments can also be affected by legislation. For example, if you are a passive investor in HUD or Section 8 housing, you are counting on government subsidies for a portion of the rental income. Any major changes in the law could have a big impact on your investment.
Other investment properties that may be affected by changing regulations include short-term rentals or assisted living facilities. So, it’s important to consider the business model carefully and understand how legislation might interfere with your investment.
If, for instance, you put your money in a building that relies on Airbnb for any portion of its revenue, be aware that the laws change all the time. Many local governments are putting limits on and in some cases eliminating opportunities for renters and owners to generate income via short-term rental.
Illiquid Diet
The final drawback to investing in multifamily is its illiquidity. Your money is tied up in the investment until the operator either refinances or sells the asset—and you don’t have access to it in the meantime.
So, if you think you may need to convert your investment to cash quickly, real estate is not the right investment for you. But if you have the means and the patience to keep your money in the asset for at least five years, the payoff is more than worth the temporary inconvenience.
At the end of the day, multifamily is a good way to achieve your investment goals. It’s low risk profile, above-average returns, and extraordinary tax benefits make it both safe and lucrative. And you can further mitigate the risks by choosing Class B and C properties in stable markets, vetting the sponsor team, and avoiding business models that can be affected by legislation.
If you are ready to learn more about investing with us, visit Nighthawk Equity to see our portfolio and receive additional information about the process. We want to support you in achieving financial freedom through multifamily investing!
