Climbing the Multifamily Investment Ladder
When it comes to investing, often times people think of building a portfolio independently rather than investing with others. Both of these investment options can be successful, though the second is often overlooked.
It’s an attractive idea to build and manage a portfolio of multifamily apartments, however, it takes time, experience, and commitment to do so; building a portfolio is often in conflict with most people’s lives. Spearheading an acquisition and asset management is a full-time job. The best way to solve this issue is to start by being a limited partner (LP, who strictly supplies the capital), and learn how to be a general partner (GP, who locates, executes, and oversees the deals). By starting as an LP, someone can learn the ins and outs of a deal, learn the difference between a good partnership from a great partnership, and gain experience to become a GP themselves.
Learn from the inside out
Investing first as an LP is a fantastic way to obtain fluency in all parts of a deal and how the system works. There is no responsibility as an LP other than to bring capital, therefore, you can focus on learning how the GP operates without any risk other than your invested capital.
To learn the full extent of the responsibilities of an LP, the key is to focus on the monthly newsletters released about the deal itself, as well as progress updates, investor calls, etc. These are perfect opportunities to dig into operations. The GP team releases continuous emails on upcoming projects, tips, tricks, and educational pieces. The perfect time to ask any and all questions to the GP team is when these pieces are released. It’s the GP’s job to remain communicative with their investors.
It is extremely helpful to study their new investment opportunities to understand why the team chose the market, how they found the deal, what their business plan is and how they intend to execute it. Also, remember to dive deep into the financials to understand how the numbers work and what makes a good or great deal.
Ways to be a good LP and GP
Being a part of the team either as a GP or an LP is a relationship-based role. There is no obligation for a GP to select a specific LP, and the GP team is allowed to pick and choose who they want to partner with for their deals which is a crucial step in the project. Investing in a multifamily syndication is an opportunity, not a right. If someone is not a good fit, that person should not be a part of the team.
To be a great LP, the focus should be centered around adding value to the team, especially if someone intends on being heavily involved. If there is something an LP can bring to the table in addition to capital, to help the GP team in any capacity, it stands to help further the LP's fluency in the project workings.
To be a great GP, the focus should be centered around executing the business plan while having excellent communication and transparency with the LPs. A great GP will select their team carefully for both the other members on the GP team and the investors becoming LPs. The team should be built to last, as it is imperative to work with people who are alike and get along with each other. There is more to this than just the money.
Starting as an LP in a multifamily syndication is the best way to gain first-hand experience while limiting risk. As an LP, someone can learn all aspects of a deal in real-time without being on the hook for anything more than their investment of capital. Having this first-hand experience is favorable to lenders as well as investors if venturing into independent portfolio building.
There are many cases where an investor initially has the intention of being a GP however, after understanding the full responsibility they decide to remain a passive investor instead of running their own syndication. If this is the scenario, it is certainly better to realize this while remaining a passive investor as opposed to starting as a GP.
A multifamily investor can gain experience, knowledge, and credibility in a multitude of ways to run their own syndication, however, becoming an LP first is the most effective way to do it.