Founder of Vive Funds, a unique multifamily investment firm specializing in curating high-quality assets for our investors.
One of the best ways to build your portfolio is to invest in real estate. It creates a source of passive income and with different property types to choose from, it offers variety for investors who are making a business out of their portfolio. For the average investor, it’s important to consider the capital needed to realize desired gains. Depending on the situation, owning commercial or single-family real estate may require more capital investment while potentially offering the same gains.
Of the three types of income — which you can define as portfolio income, earned income and passive income — passive income is the only income that doesn’t require a significant investment of time to earn it. So, what is passive income? IRS has defined passive income as any business activity which does not involve your direct participation. Once you put your investment into a rent-producing piece of real estate, the income you receive is your passive income. This income clock keeps ticking in your favor without needing to take significant action on a daily basis.
Single-Family Versus Multi-Family
One question facing real estate investors, especially new investors, is whether to invest in single-family units or multifamily units. In this current pandemic-induced uncertainty, the price volatility of an investment is of prime concern. A study of investment patterns and valuation has shown that when the economic situation improves, it is the asset value and income from multifamily investments that recover faster than many single-family units. Multi-family occupancy has held up since the Great Recession, while delinquency rates for multi-family loans remain low. A part of this trend can be attributed to the demographic profile shifting toward Millennials and the ‘Next Gen’ crowd, who prefer to rent (not own) multifamily units rather than single-family units.
One advantage of investing in multifamily units rather than single-family units is that it is much easier to get one loan versus several. If the investor intends to invest in five multifamily units, they will only need to secure one loan, instead of the process involved in investing in five different single-family units. The same holds true for insuring the property, too.
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Real Estate Investment Trust
A real estate investor may have money to invest but may not have the time to manage their investment like they would have to with single-family properties. A real estate investment trust (REIT) is a common investment for new investors interested in single-family homes or multifamily properties. A REIT uses funds received from its investors to buy units. The REIT fund managers are professionals in this field but they often do not have a personal stake in the investments.
Real Estate Syndication
Syndicated deals present another option for investors. In this type of investment, management typically has skin in the game. They invest personally alongside investors. This is the key difference between the type of experience investors in syndication deals have versus REIT. Some models even enhance the risk mitigation by spreading it over several units, sometimes 100 or more. Part of the appeal is the ease of management which allows for investors to build their portfolio at a faster pace.
There are multifamily investment opportunities across the country, each with varying levels of potential to become leading areas. My team and I have been analyzing the Atlanta area, looking at its market throughout economic downturns and even the last housing market crash. Wherever you invest, keep in mind the types of deals and properties available to help add to your portfolio.