Risk Reduction of Multifamily Investing

Risk Reduction of Multifamily Investing - Featured

Investing in a multifamily syndication gives you three major advantages that reduce risk. I call these the spread, cost, and team. These risk reductions are built-in to how a multifamily syndication functions.

The Spread

A real estate syndication, by definition, is the pooling of capital from multiple investors. Having multiple investors spreads out the risk so you’re not putting your eggs all in one basket.

The Cost

By having multiple investors with the common goal of acquiring the same real estate, the cost for each individual investor is reduced. You would have access to a high-quality investment for a lower dollar amount and risk.

The Team

By investing with an experienced sponsor, you are teaming up with someone who has gone through the real estate syndication process successfully before. Your risk is further reduced when you have a sponsor on your time with a strong track record.

Which scenario sounds less risky to you?

(A) You put $1 million into a single piece of real estate, taking on the full risk of the project on the hope that it will grow over time, or
(B) You put $50k into a multifamily syndication, taking on only a part of the spread of risk, with a dedicated and experienced sponsor at your side.

The Risk of Multifamily Investing vs. Stock

Real estate fulfills the basic need of shelter –– it’s never going out of style. Stocks, on the other hand, can have the same risk volatility as a night at the casino. This is clear when you consider that the risk-adjusted return of multifamily syndications has outperformed both the stock and bond markets of the last twenty years.

Commercial lenders, such as your bank, are willing to front the initial capital needed to invest in real estate. If there is any institution that takes risk reduction very seriously, it’s the bank. They do their own due diligence on the market and risk mitigation calculations before they give out loans to potential real estate investors.

When you invest in the stock market, it is your own personal capital on the line. No bank is going to give you a loan for your “million-dollar-winning-stock.” Commercial lenders know that’s too risky, but they'll draft you a loan for sometimes 80% of the capital needed for a real estate investment.

The Risk of Multifamily Investing vs. Other Real Estate

The Risk of Multifamily Investing vs. Other Real Estate

According to calculations by the US Treasury Department, multifamily syndications have the best risk-adjusted return of any other real estate asset class. An investor’s risk is reduced when investing in a multifamily syndication by the conservative use of debt, diversification of assets, and disciplined buying of a property.

Why is multifamily investing more appealing than other types of real estate, you may be asking? There is a strong demand for multifamily housing as baby boomers downsize and millenials look for affordable living spaces. Rentership is on the rise, especially as the population continues to increase.

If your invested single family home is vacant of one family, it’s 100% vacant. If your invested 100-unit multifamily apartment syndication building is vacant of one family, it’s 1% vacant.

Your risk as a real estate investor is also significantly lower when investing in multifamily syndications because your investment is secure and profitable even during an economic downturn.

Reducing Risk of Multifamily Investing with a Good Management

The Risk of a Multifamily Investment During a Recession

Consider this: when a serious recession hits the American economy, what kinds of real estate are most affected?

  • People are not going on vacation, so hotels have lower occupancy.
  • Instead of spending, people save their money, so retail businesses take a hit.
  • Without a demand on production, industrial locations slow down.
  • The office workers that own these businesses downsize, or even close.
  • As yield on real estate investments slows down, even office real estate businesses start hurting!

    The investors of all the above types of real estate are at a much higher risk than those of multifamily syndications. In fact, the demand for multifamily real estate increases!

    During a recession, the lower rental rates are a high priority for prospective tenants, and more people move into multifamily living locations. Further, it takes time for individuals to rebuild their credit after a recession hits. This means not only are more people moving into multifamily locations, they are staying there longer.

Reducing Risk of Multifamily Investing with a Good Management

Passively investing in a multifamily syndication means you receive the profits of your investment without having to deal with the day-to-day responsibilities of the property. Your sponsors, especially if they are experienced and highly regarded, should already have a good management team in place.

The cash flow produced by a multifamily syndication produces enough for high-quality professional property management services without significantly cutting down the profits shared with investors.

A real estate investor of a single-family home, by contrast, has to manage the property themselves. On top of maintenance and repairs, they are responsible for finding, screening, collecting rent from, and handling any issues with tenants. The profit of their small portfolio would be significantly cut into if they had to pay for a separate property manager.

Low Risk and High Returns

Low Risk and High Returns

With the spread of multiple investors, lowered minimum cost to invest, and an experienced sponsor on your side, risk reduction is another huge advantage to passively investing in a multifamily syndication. It’s better than playing the stock market, investing in other types of real estate, and is even profitable during an economic recession.

For more details, look out for my next blog posts in this series of ten advantages of passively investing in multifamily syndications.


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Delphine Nguyen, Investor

Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.

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