Passive Investing is one of the best ways to receive the benefits of owning an apartment complex without the time commitment, asset identifying, market analysis and funding the entire deal. As well as creating and executing the business plan.
- Assuming you found the right general partnership and qualified team, compared to other passive investment vehicles, such as stocks, bonds or REITS, apartment syndications cannot be beat.
- The returns offered to the limited partner aka the passive investor vary from general partner to general partner. Meaning every general partner (GP) is different.
- Limited partner (LP) is an equity investor.
Equity Investor
- Equity investor is the most profitable.
- Participate in the upside of the deal.
- Will not receive their initial equity investment until the sale of the apartment complex.
- Most common ongoing return is called a preferred return aka a “pref”.
- Preferred return ranges from 2% to 12% annually
based on the experience of the GP and their team, the factors of the project
and the investment strategy.
- The less experience and the more risk, the higher the returns.
- The GP will offer the highest percentage for distressed apartments and the lowest percentage for turnkey apartments, with value-add apartments falling somewhere in between.
Example:
- Highly distressed apartment deal the GP may
offer 12% preferred return.
- With a low or no return during the stabilization period, the preferred return will accrue and be paid out to the LP in one lumpsum.
- For turnkey apartments the preferred return will fall toward the lower end of the range, since the building is already stabilized and minimal value can be added, there is less risk.
- For value-add opportunities, the typical preferred return that is offered can lay anywhere from 5%-8%.
Common Structure
- The most common equity structure for value-add apartment deals is an 8% preferred return with a 50/50 LP/GP profit split.
- Next common is 8% preferred return with a 70/30 LP/GP profit split until the LP IRR passes a certain threshold, at which point the remaining profits are split 50/50, which usually occurs at the sale).
Most investors invest passively because of their hectic work schedule and goals of creating passive streams of income instead of their capital losing value due to inflation.
By learning these concepts and terms, you’re separating yourself from the novice investor looking to be more active than passive. Here’s where you can learn more multifamily investing terms.
