Multifamily Investments for both GPs and LPs
Multifamily housing is a popular asset class for investment, both for General Partners (GPs) and Limited Partners (LPs). But a multifamily investment strategy can take many angles and vary significantly, depending on a variety of factors. Read on to learn more about the various multifamily investment strategies being employed by today’s GPs, and maybe you’ll learn about a new-to-you strategy that makes sense for your next multifamily deal.
Note: Covercy is the first investment management platform being used by multifamily investors to distribute funds and collect capital contributions all in a single platform. See how Covercy could work for your real estate firm with a free demo, or check out Covercy’s transparent pricing.
Multifamily Asset Classes 101
Let’s start at the beginning. In real estate, the term “multifamily asset class” refers to a category of properties that are designed and intended for residential purposes and offer multiple separate housing units within a single building or complex. These properties are commonly referred to as multifamily properties or multifamily housing. The multifamily asset class typically includes the following property types:
These are large buildings designed for residential purposes, consisting of multiple units or apartments. Apartment buildings can range in size and may have various amenities, such as common areas, parking facilities, and recreational spaces.
Condos are individually owned units within a larger multifamily complex. Each unit is owned by an individual homeowner, and the common areas and building infrastructure are collectively owned and managed by a condominium association.
Townhouses are individual units that are typically attached to one or more neighboring units. They offer multiple levels of living space and may share common walls. Townhomes can be part of a larger multifamily development or exist as standalone properties.
Duplexes, Triplexes, and Quadplexes
These properties consist of two, three, or four separate residential units within a single building. Each unit has its own entrance, living space, and amenities, allowing for multiple households to occupy the property.
The multifamily asset class is distinct from other types of real estate asset classes, such as single-family homes, commercial properties (e.g., office buildings, retail centers), and industrial properties. Multifamily properties provide housing options for a diverse range of tenants, including renters and owner-occupants, and can be attractive investments due to the potential for consistent rental income and long-term appreciation.
Investors and real estate professionals often analyze and evaluate properties based on factors such as location, unit mix, rental rates, occupancy rates, operating expenses, and market dynamics to determine the ideal multifamily investment strategy.
7 Winning Multifamily Investment Strategy Approaches
There are several top multifamily investment strategies that commercial real estate general partners (GPs) or syndicators often employ. These strategies can vary depending on market conditions, investor objectives, and the GP’s expertise. Here are some popular multifamily investment strategies:
- Value-Add Investing: This strategy involves acquiring properties that have the potential for improvement and value appreciation. GPs typically identify underperforming assets, implement renovations or operational improvements, and increase rents to generate higher returns. Value-add investing often targets properties with moderate to high vacancy rates or properties in need of upgrades or repositioning.
- Core Investing: Core investments focus on stable, well-performing properties with reliable cash flows. GPs target properties in prime locations with high occupancy rates, strong rental demand, and favorable market fundamentals. Core investments offer lower risk and potential for steady income streams but may have relatively lower returns compared to other strategies.
- Development or Ground-Up Construction: Some GPs engage in ground-up development of multifamily properties. This strategy involves acquiring land or underutilized properties, securing necessary approvals and permits, and constructing new buildings. Development projects require substantial expertise, experience, and access to capital but can yield attractive returns, especially in high-demand areas.
- Distressed Investing: Distressed investing involves acquiring properties facing financial or operational distress. GPs take advantage of distressed situations, such as foreclosures, short sales, or properties in need of significant rehabilitation. This strategy requires thorough due diligence to assess risks and potential value-creation opportunities.
- Adaptive Reuse: This strategy involves converting existing non-residential properties, such as warehouses, factories, or office buildings, into multifamily assets. Adaptive reuse allows GPs to repurpose underutilized or outdated structures into attractive residential properties, capitalizing on unique architectural features and cost savings compared to ground-up construction.
- Opportunistic Investing: Opportunistic investments entail taking advantage of market anomalies or specific events to generate high returns. GPs may target distressed markets, undervalued properties, or unique opportunities arising from changes in regulations or economic conditions. This strategy carries higher risk but can offer substantial upside potential.
- Syndication or Fund Investing: GPs often form syndications or investment funds to pool capital from multiple investors to acquire multifamily properties. By leveraging the collective resources and expertise of the group, GPs can pursue larger and more complex transactions. Syndication structures may vary, including joint ventures, limited partnerships, or private equity funds.
Consider Your Limited Partner (LP) Preferences & Risk Tolerance
Limited partners (LPs) in commercial real estate syndications or funds have diverse multifamily investment strategy preferences and risk profiles. The preferences of LPs can vary based on factors such as their investment goals, risk tolerance, and market conditions. While it is challenging to make generalizations, here are some tendencies that can be observed:
- Core and Core-Plus Strategies: LPs seeking stable income and wealth preservation often gravitate toward core and core-plus strategies. These strategies typically offer lower risk, reliable cash flows, and the potential for modest appreciation. Investors such as pension funds, insurance companies, and individuals seeking consistent income streams may favor these strategies.
- Value-Add and Opportunistic Strategies: LPs with higher risk tolerance and a desire for greater upside potential may be attracted to value-add and opportunistic strategies. These strategies offer the opportunity for significant value creation through property improvements, repositioning, or capitalizing on market inefficiencies. High-net-worth individuals, family offices, and opportunistic-focused funds may be more inclined to invest in these strategies.
- Risk-Adjusted Returns: LPs often evaluate investment strategies based on risk-adjusted returns. They seek a balance between risk and potential rewards. Value-add and opportunistic strategies may offer higher potential returns, but they are typically associated with higher risks. LPs may evaluate the risk-return profile of different strategies and select the one that aligns with their investment objectives.
- Diversification: LPs often seek diversification in their investment portfolios. They may prefer strategies that provide exposure to different property types, markets, and investment approaches. Diversification can help mitigate risk by spreading investments across various assets and market segments. Syndications or funds that offer a mix of strategies or a diversified portfolio of multifamily assets may appeal to LPs looking for risk mitigation through diversification.
- Track Record and Expertise: LPs place importance on the track record and expertise of the general partners (GPs) or syndicators. GPs with a proven history of successfully executing specific investment strategies are likely to attract LPs who have a preference for those strategies. LPs often conduct due diligence on the GP’s experience, performance, and alignment of interests before committing capital.
It’s important to recognize that LP preferences can vary greatly, and individual circumstances and market conditions influence their investment choices. Successful syndicators or GPs typically tailor their investment offerings to meet the needs and preferences of their target LP base while aligning with their own expertise and market opportunities.
Manage Your Multifamily Investment Strategy with Covercy
Meet Covercy, a cutting-edge commercial real estate syndication software designed exclusively for multifamily general partners (GPs) and limited partners (LPs). What sets Covercy apart is its integrated banking functionality, revolutionizing GP-LP relationships. With instant distribution payments to LPs and the ability for LPs to make immediate capital contributions, Covercy streamlines the financial aspect of multifamily investments.
Say goodbye to idle funds or committed capital tied up in traditional money markets, escrow, or high-yield savings accounts. With Covercy, your funds can be securely held in dedicated checking accounts, earning highly competitive interest rates while remaining easily accessible. No more compromising liquidity for profitability.
On top of its banking capabilities, Covercy boasts an exceptional investor portal designed specifically for the multifamily asset class. Experience the seamless interface that offers real-time investment updates, personalized reporting features, and a comprehensive investor CRM. Stay organized, informed, and in control of your multifamily investments.
Covercy simplifies administrative tasks with its built-in e-signature capabilities and document management. Streamline document execution, making the process efficient and hassle-free for both GPs and LPs. Join the multifamily GP and LP community who are enjoying the benefits of Covercy’s unique platform. Elevate your multifamily investment experience with state-of-the-art technology and enjoy the convenience, transparency, and efficiency that Covercy brings to your GP-LP relationships. Request a demo today.