Passive multifamily investors typically aim to generate income and build wealth through real estate investments while minimizing their involvement in investment operations. However, the level of passivity seems to be diminishing more and more in todays economic climate due to a number of factors. Poor asset management, loose structures, no interest caps on floats, sourcing the wrong property management company and weak investor relations teams.
Of course this can vary depending on the economic conditions and specific investment strategies. Recent studies have shown that investors are only averaging 5% return of the promised 15-20% IRR. This has pushed investors to move their money to bonds that see steady 5.25% returns and less risk. I predict that this average trend of return will decrease as more loans become due and refinance cash-ins begin to spread across markets. In fact, 15-20% IRR pitches are now seeming like a red flag for investors. As an active partner, we have to become better at Asset Management and operations to execute and underwrite our deals properly and manage our investor promises.
The benefit of multifamily real estate investments for passive investors still outweighs bonds, stocks, etc. Investing with the right team can 2x and 3x returns in a short amount of time with little to no involvement, providing more time to relax and financial freedom. Investors can also benefit from various tax benefits, deductions on mortgage interest, property taxes, depreciation and other liabilities to maximize returns. The number of AUM or doors currently under management should no longer be a leading factor to effectively qualify execution of a multifamily deal. The number of years the active players have in operations on the same asset class, the unique and diverse asset holds and the amount of real estate cycles the team has weathered needs to be considered. Remember, anything can look good on paper, but what is a promise if you cannot deliver?
Here are a few other reasons why passive multifamily investors may be less passive in the current economy:
- Market Volatility: Economic conditions can be volatile, and market fluctuations may require investors to monitor their investments more closely. In uncertain times, passive investors may feel the need to stay informed about market trends, tenant demand, and property performance to make informed decisions.
- Changing Tenant Landscape: Economic downturns can impact tenant demographics, employment rates, and rental demand. Passive investors may need to adapt their strategies to attract and retain tenants, monitor rental rates, and stay updated on local market dynamics.
- Property Management Challenges: Even with professional property management in place, economic fluctuations can bring unique challenges. Investors may need to communicate with property managers more frequently to ensure appropriate strategies are in place for maintenance, tenant retention, and financial management.
- Financing and Capital Raising: Economic conditions can impact financing options and interest rates, which may necessitate active involvement in securing favorable financing terms. Additionally, passive investors might need to participate in capital raising efforts or evaluate refinancing opportunities to optimize their investments.
- Risk Mitigation: Economic downturns or unexpected events can increase risks associated with multifamily investments. Passive investors may need to actively collaborate with professionals to assess and mitigate risks, such as insurance coverage, property inspections, and contingency plans.
It’s important to note that while passive multifamily investors may become more involved during certain economic conditions, the goal of passive investing remains intact: to generate income and build wealth with a reduced level of direct involvement compared to active investing. The extent of involvement can vary based on individual preferences, risk management operations, market conditions, and the level of control desired over investment outcomes or capital stacks.