Multifamily real estate can offer investors compelling returns and exposure to arguably the most resilient real estate sector. What are the keys to passively investing in multifamily successfully?
This podcast episode is the audio version of the keynote presentation from the recent Multifamily Investor Expo. It is titled “Passive Multifamily Investing For High Net Worth Investors: 3 Keys To Success.” This keynote is given by MultifamilyInvestor.com founder Scott Hawksworth. Recorded live on February 22, 2022.
Click the play button above to listen to the conversation.
- Qualitative items to consider when investing in a multifamily property.
- Why “multifamily” is such a broad term when it comes to real estate.
- The difference between Class A, Class B, and Class C properties.
- What some of the key quantitative metrics for multifamily investing are.
- The difference between IRR, Cash-On-Cash, and Equity Multiple.
- What questions investors should consider asking sponsors before investing.
Featured On This Episode
- Multifamily Investor Expo
- Once-In-A-Generation Response Needed to Address Housing Supply Crisis – National Association of Realtors
- Why Multifamily Is the Most Attractive Asset Class – National Apartment Association
Industry Spotlight: Multifamily Investor Expo
Welcome to the Multifamily Investor Expo. This upcoming online event is designed to match passive investors with multifamily real estate funds that are seeking capital. Whether you’re a seasoned real estate veteran or just starting out, this event can help you find your next passive multifamily investment.
Learn More About The Multifamily Investor Expo
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott: I am really excited to be opening this event with a relatively quick overview of the keys to success in multifamily investing. But I hope we’ll tee up some fantastic fun presentations you’re gonna see here. And as you are watching these upcoming presentations, really keep these in mind. I think this can function as a great framework for you as you’re evaluating these upcoming presentations and thinking about them. So, before moving forward, quick legal disclaimer, of course, this is not legal advice or investment advice. So, please do consult with your financial professionals before investing in anything. A little bit about me. My name is Scott Hawksworth. I am based in Chicago, Illinois. I’m the founder of multifamilyinvestor.com. And I sometimes get this question, you know, why put on a multifamily event, why found multifamilyinvestor.com? And put simply, multifamily is an asset class that has a tremendous potential to boost returns, provide a hedge against inflation, and really help build long-term wealth. And our platform at multifamilyinvestor.com is dedicated to helping investors make more informed investment decisions. So, that’s what this is all about
Now, who are these investors? Well, this presentation specifically is for accredited investors. And an accredited investor is a person with an annual income of at least $200,000 or $300,000 if combined with a spouse. And we are talking about investing in private 506(c) real estate funds with minimum investments of at least $50,000. So, if that describes you, you are in the right place. Welcome, welcome. So, okay. The three keys to multifamily investing. When I talk to investors interested in this asset class, these are three areas I really like to highlight. And if they seem simple, that’s by design. That is good. Of course, you wanna dive into the details when you can, but, again, having that high-level framework will help you make better investment decisions.
So, the first key, the first key is more of a qualitative nature, and that is understand the many types of multifamily investments. Multifamily properties, it’s really a broad term. It could describe a property that is a luxury high rise in downtown Miami, or it could describe a property that’s a 1950s apartment-style complex with only 10 units in rural Oklahoma. Both of those would be multifamily properties and both could be fantastic investments, but, again, it’s important to understand how different they are, the qualitative differences there. Then when we’re talking about funds, you could have one that is just a single asset versus a multi-asset fund which would have multiple properties across a state or a region of the country. And then even going further, you have class A, class B, or class C properties, and I wanna dive a little bit into that. So, class-A properties. And, again, these are not set in stone rules. You can see variation between all of this, but in general, class A tend to be in the most desirable locations, have the most expensive rents, have the most abundant or high-end amenities.
And then if you’re moving down the line down to class C, least desirable locations, least expensive in terms of rent, maybe limited or no amenities. So, again, there’s a lot of qualitative differences here, but they can all be fantastic investments. It’s just important to understand what type of property you’re actually investing in there. To really drive this home too, you’re going to see pitches upcoming for a number of funds that have different value propositions and different strategies for how they’re going to achieve success and achieve returns. So, you may have diversified funds which have a portfolio of projects across the U.S. to really spread that exposure out and generate those returns. You may have tax-advantaged funds which might offer some powerful benefits. We have an upcoming presentation from Jimmy Atkinson, all about opportunity zones. So, you could have a fund, for example, that’s set in opportunity zones which offers some benefits when it comes to capital gains. And then, once again, you could just have a single asset fund which focuses on a single property and aims to take advantage of the growth opportunities in a specific Metro area. So, really, just illustrating all the qualitative aspects there.
So, when we talk about qualitative, then number two is the quantitative aspect of it. And that’s really, really key. You know, if the first is looking at diversification, the market, the property type, then this is about focusing on those concrete numbers, your expected returns, the time horizons for how long your cash is gonna be tied up, and the fees that you’ll pay as part of the investment. So, you can get a bit detailed, and some of these numbers can seem overwhelming, but I want to just highlight a few of the key numbers to keep an eye on. And, you know, at the risk of sounding obvious, you’ll wanna understand what returns you can expect from your investments. So, these are three of the general metrics that I like to highlight, and you will see in some of these upcoming presentations pointed out there.
So, the first is the equity multiple, which is pretty straightforward. If you were to make a $100,000 investment and you were to expect $400,000 in total distributions, well, then your equity multiple would be four, which would be really exciting. Next is the IRR which really takes the time value of money into account. So, it’s really about when you’re going to receive those $400,000 in distributions in this example. And then last you have your cash on cash which is really a way to quantify the cashflows. So, a cash on cash return of 10% on that theoretical $100,000 investment, you could expect to receive roughly $10,000 in annual distributions. So, okay. That’s when we’re talking about returns, what about the holding period? So, investing in multifamily is not like buying Apple stock. Your money is going to be tied up for a lot longer.
So, it’s important to understand how long will that be? How long will it be before the property is stabilized and generating some cash? How long will it be if there’s a refinance? If there’s a refinance, they may have a liquidity event at that point. How long will it be to that? And then, lastly, what is the time horizon for the ultimate exit, which is where many of your returns can come from. And then, lastly, looking at the expenses, it’s important to talk about the fees, understand what those are. And when you’re talking about the distributions, you know, what’s the sponsor promote. You’re gonna see some funds here that have waterfall distributions to really align the interests with the GP and the LPs. So, again, understanding those quantitative aspects is absolutely critical when you are considering multifamily investing.
Key number three kind of brings it all together. If we talked qualitative and we talked quantitative, this is the one where I say, do your homework. So, understand the assumptions that drive the bottom line expected return numbers. Ask questions, request documentation when appropriate, really feel free to dig in. That is a key to success. And you’re gonna see fund managers that are really happy to have those conversations with you. They want you to ask them questions. They want to help you really understand your investment and the opportunity there, and they have investor relations teams at the ready to do just that. And they want to have that communication going. So, take advantage of it. And just to give you an example of a few questions that you can really ask, first, ask about the sponsor’s track record. How much experience do they have working with developers and local governments in their target markets?
Have they developed properties that are like the one that is in their fund that they’re talking about? And, again, have that conversation with them. Ask if they can point to successful projects they’ve been a part of in the past. That is a great question to have. Then second, ask about their partnerships. Do they have great partnerships with partners who they work with? That is also key. And then, lastly, what does their team look like? Does the sponsor have a strong team in place with diversified skill sets, a lot of different knowledge that they can bring to the table and really help the project to be a success? These are all qualitative aspects to consider and areas to do your due diligence in.
But once you’ve done that, maybe you wanna learn a bit more about multi-family investing. You wanna dive in even deeper. Well, that’s where we come in. You can go to multifamilyinvestor.com. We have educational resources, news updates. You can check out the “Multifamily Investor” podcast on your favorite podcast app of choice, or if you’d like, we have a video show, a video recording of that podcast each and every week for new episodes. If you wanna see my smiling face, you can check us out on YouTube. And then you have attended today’s expo and we’re gonna have replays of today’s event. And then, lastly, again, kind of in the zone of keeping those conversations going, feel free to email us, [email protected] We want to hear from you.