Elevate Your Finances Through Multifamily Investing 

New year, new beginnings. Like many, growing your wealth in 2024 is top of mind. Having a financial plan is imperative to reach your goals. Investing in Multifamily real estate can provide a secondary income without dedicating time to a second job. Multifamily investing through syndication is completely passive and lets your money do the work for you. In this article,we will discuss the Multifamily outlook for 2024, different types of Multifamily investment business models, and the benefits of passive investing.

Positive Outlook Ahead

2023 was considered a flat Multifamily real estate market.  Interest rates were at their peak, and the economic uncertainty created fewer transaction opportunities for sponsors. There were many predictions of a recession hitting the US economy, but after the unexpected volatility of 2023we are expecting a softer landing than previously anticipated. 

As we enter 2024, the FED announced decreases in interest rates for the upcoming 12 months. As interest rates become more approachable we will see sponsors more likely to underwrite deals that fit in their buy box. This will allow investors to have more opportunities than were available in the last 12-18 months. More favorable loan terms as well as over $100 billion in Multifamily debt maturing in the next 24 months, will yield higher transaction volumes in the Multifamily space as well.  

How to Take Advantage of Syndication Opportunities

 As you look to grow your wealth and build financial freedom exploring passive income options is a natural fit for many busy professionals. Multifamily real estate syndication offers many options in sponsors, regions, initial costs, and structures. The first step to taking advantage of these opportunities is to become an accredited investor. To participate in a syndication deal, all investors must become accredited. Once you are accredited you should perform due diligence on many sponsors looking for 

What is an Accredited Investor?

Accredited investors meet three primary criteria:

• Financial Criteria: An individual or entity that meets set income or net worth benchmarks set by securities regulators.
• Investment Opportunities: Accredited status allows access to high-risk, high-reward ventures, such as private placements, not open to the general public.
• Purpose: Deemed financially sophisticated, these investors have fewer regulatory protections but greater investment freedoms.

Requirements for Becoming an Accredited Investor

Financial Requirements

• Income Standards: Individuals should have an annual income exceeding $200,000 for the past two years, or $300,000 when combined with a spouse.
• Net Worth Requirement: A net worth that surpasses $1 million, excluding the primary residence’s value.
• Consistent Earnings: The demonstrated expectation of reaching the same income level in the current year.
• Investment Knowledge: A clear understanding and awareness of the risks associated with the investments they are accessing.
• Documentation: Ability to provide financial statements or other documentation to verify income and net worth when requested.

Once you are accredited you should perform due diligence on many sponsors looking for the right fit for you. This should include reviewing their track record, evaluating their open deals, and reading investor testimonials and reviews. 

Green Flags of Trustworthy Multifamily Sponsors

• Strong Track Record
• Positive Investor Testimonials
• GPs invest their own money into the deals 
• Realistic Underwriting Assumptions
• They use agency loans
• Their deal assumptions don’t mirror your investment strategy 

Types of Multifamily Deals

There are many different types of Multifamily deal offerings. Understanding the differences as well as the nuances of each is very important. 

Multifamily Investment Types:

• New Development- Ground up, new construction builds. 
• Class- A: Core or Core Plus- newer property with less deferred maintenance, and less risk due to stable occupancy, a better area, and newer building materials. 
• Class B: Value-Add Strategy- 
• Class C: Opportunistic- requires heavy lifting to renovate and improve. It will carry the highest risk potential but can yield a higher return because it was purchased at such a discount.  
• 1031 Exchange Deal- this is a specialized deal where the investors and sponsor transfer all funds from one deal at disposition directly into a new deal to acquire a new like-kind property.  
• Funds- 

1. Preferred Equity- A debt fund allowing the sponsor to allocate the funds as preferred debt to help acquire a new property or assist a suffering project. 
2. Buy Box- A fund allocated to purchasing multiple properties that all fit in one buy box to diversify the investor’s portfolio and risk all with one investment. 

Can Sponsors Provide a Variety of Investment Opportunities?

Usually, sponsors tend to specialize in a particular type of deal as their primary focus or business model. While it’s not uncommon for them to offer various deal types, sponsors often excel in what they are familiar with. At Viking Capital, our business model primarily centers around Class B value-add projects, especially given the economic landscape of the last 18 months. This strategic approach has enabled Viking to successfully acquire three new properties during a period of reduced transactions. For a detailed look at our track record and current properties, please visit our track record.

Benefits of Multifamily Syndication 

• Tax Benefits: 

• Lower Capital Gaines Taxes

• • Capital gains tax is imposed on the profits from your investments. 

• Capital Gaines Formula:  Selling Price – Purchase Price = Capital Gaines 

• In Multifamily syndication, the hold period is 3-5 years creating long-term capital gain implications where are taxed at 0, 15, or 20% depending on your tax bracket contrary to short-term where you are taxed like your ordinary income. 

• Depreciation

• This benefit allows real estate professionals to write off the property over time due to wear, tear, and deterioration. There are three types of depreciation: straight line, accelerated, and bonus. 
  1. Straight-line: The typical depreciation timeline is 27.5 years
  2. Accelerated: Property owners can have a cost segregation study performed via a third party. This study “segregates” out the different building components, which can then be depreciated over shorter timelines of 5, 7, or 15 years. Examples include roofs, appliances, and cabinets. 
  3. Bonus: allows taxpayers to front-load the depreciation even more. Investors can immediately depreciate items with less than a 20-year life in the first year. This benefit is being tapered down and will not be available after 2027. 

• 1031 Exchange

• As a real estate investor, you can use a tool in the tax code called 1031 like-kind exchanges which allows you to defer profits (capital gains) made on the sale of your investment property.

1. Rules to Use of 1031 Exchange:

• Exchange (sell) one property for another (like-kind). It must be real estate for real estate.
• The replacement property must be of equal or greater value.
• You have 45 days after you sell your property to identify up to 3 new properties.
• You’ve got 180 days to close on one or more of the three identified properties.

• Benefits of Refinancing 

• Mortgage interest deduction: After refinancing, the interest you pay on a new loan is still tax-deductible, just as it was with your original mortgage. This means you can continue to claim the mortgage interest deduction on your federal income tax return. Doing so could help lower your taxable income and overall tax liability.

• Passive investing offers the incredible benefit of generating income without sacrificing time. This means that you can make money without having to give up your valuable time that you could be spending on more important things. These things could be your profession, family time, travel, hobbies, or passions. In other words, passive investing can allow you to earn money while still having time to pursue the things that truly matter to you.
• Lower Risk Profile: One advantage of investing in Multifamily properties is inherent risk mitigation. Unlike other types of real estate investments, multifamily properties have multiple units, which reduces the impact of vacancies. For example, a single-family home with no occupants has 0% occupancy, while a building with 10 units and one vacancy still has 90% occupancy. This means that cash flow is more stable and risk is minimized. The second way investing in multifamily properties has less risk is despite the state of the economy, there will always be a demand for shelter, unlike other real estate such as commercial buildings, offices, and restaurants. 

Why Choose Passive Investing:

Recognizing your motivations to enhance your wealth is crucial. Some invest to fund a child’s college education, secure a comfortable retirement, or establish financial stability to weather job loss or emergencies. As success unfolds, many opt to leverage passive income as a means to replace their traditional salary. The allure of tax benefits, time freedom, and the potential to compound profits makes passive investing an attractive choice. Through this approach, individuals can build long-term wealth, enjoy a consistent income stream, and carve out time for pursuing their passions.

Our Success Story

Viking Capital was founded by two physicians who started passive investing to secure more time for the people they love and reclaim the moments they were missing. This decision led them to collaborate with sponsors, learning invaluable insights along the way. Progressing from Co-General Partners (Co-GPs) to ultimately becoming General Partners (GPs), they embarked on their inaugural deal, and the success of this venture propelled the birth of Viking Capital. Now, with 8 years of unwavering commitment, 25 acquired deals, and $750 million under management since 2015, Viking Capital continues to flourish. Co-founders Vikram and Ravi, having transitioned from active medical practice, now channel their energy into initiating and growing companies that align with their passions, dedicated to helping others achieve their aspirations.

Closing Thoughts

As we embark on the journey of 2024, we anticipate a year brimming with promising opportunities. It’s a moment to embrace calculated risks that can yield substantial rewards. Whether you’re a seasoned investor aiming to diversify and expand your portfolio or a newcomer contemplating your inaugural investment, boldness tempered with caution is advised in this economic cycle. Echoing the wisdom of Warren Buffet, “Be fearful when others are greedy, and greedy when others are fearful.” While challenges lie ahead, adept investors can navigate these obstacles to uncover opportunities reminiscent of those arising from the 2008 meltdown.

FAQ’s 

1. What makes Multifamily real estate different from other real estate investments?

Multifamily real estate includes properties designed for multiple households, like apartment buildings and townhome developments, accommodating diverse tenants. Unlike single-family homes, they offer more stability due to their affordability and diverse demand.

2. How do market conditions affect multifamily real estate investments?

Market conditions, such as local supply and demand, significantly influence property values and rental rates. Economic factors like population growth and employment opportunities also impact multifamily property demand.

3. How can investors mitigate risks in multifamily real estate investments?

Diversification by investing in various locations and asset types is essential. Conduct thorough due diligence, researching the local market, property, and regulations. Consider real estate syndication to spread risk and benefit from professional expertise.

4. What is real estate syndication, and how does it work in multifamily investing?

Real estate syndication involves pooling funds with other investors and handing off day-to-day property management to a syndicate company. This allows individual investors to spread financial exposure across multiple properties, reducing the impact of potential losses. It’s a way to invest in multifamily properties without being the sole investor.

5. What is a Recession?

A recession is characterized by a decline in economic activity, typically accompanied by elevated unemployment, reduced consumer spending, and a decrease in commercial transactions. A widely accepted guideline is that a recession is identified when there are two consecutive quarters of negative gross domestic product (GDP) growth, though more intricate formulas may also be employed at times.

6. How Can a Recession Affect Multifamily? 

In the realm of commercial multifamily properties, an increase in unemployment leading to potential job losses can result in a decline in rental demand and rental rates. Such shifts can have repercussions on the overall valuation of commercial multifamily properties, as their value is closely tied to the income they can generate.

Therefore, similar to the residential context, numerous owners and operators of commercial real estate may opt to retain their properties during a recession if they have the capability, rather than engaging in buying or selling activities.