Investing in multifamily real estate can be a lucrative and rewarding endeavor, but it’s important to understand the different types of deals available and their associated risks and returns. Especially for those investing passively in syndication structures, aligning a project’s goals to your own is crucial.
There are three main types of multifamily deals: turn-key, light value-add, and heavy value-add. Which one is right for you depends on your risk tolerance and the financial return you’re willing to accept. In this article, we’ll talk about the three most common types of multifamily strategies you can invest in as a capital partner from a risk tolerance and a cash flow distribution perspective. These are the perspectives I see most capital investors considering when considering deploying capital, so we’ll evaluate these key criteria in the different project types. By the way, if you’re thinking of investing in a value-add deal, make sure you download my free guide on the four questions I ask myself prior to investing in a value-add multifamily deal!
Turn-key projects are the most de-risked and provide a low-maintenance investment opportunity. The return profile of these deals is typically lower than other types of investments, but they are safe and relatively straightforward. With these kinds of deals, you can most likely expect to receive cash flow distributions right away and pretty consistently, as there should be no interruption in the operations.
Light value-add projects require some updating, such as fixture and appliance upgrades, paint, and flooring work. While these projects have a slightly higher risk profile than turn-key deals, the risk is still relatively low and the returns can be higher than a turn key project. However, there is always some room for error with construction and tenant stabilization. In terms of distributions, depending on the extent of the lift you may start to see some cashflows come out right away or within a few months if there are a lot of units turning over.
Before talking about heavier value-add projects, I will say that light value-add is probably where most first time passive investors should start. The risks and complications of execution are on the lower side, but there is still some upside to be captured. When having conversations with new investors looking to deploy capital, this is the type of strategy that I see resonate the most.
Heavy value-add projects are the riskiest of the three types, but also have the potential for the highest returns. These projects often involve full gut renovations and require a deep understanding of the risk profile and potential financial consequences. Timing and budget are critical factors and there is always room for error. Distributions in heavy value-add projects are typically deferred for 6-12 months, so if you need immediate cash flow, this may not be the ideal investment for you.
With the heavier value-add projects, you really want to make sure you evaluate the business plan and feel confident in the execution. I’ve seen these projects get held up and even potentially go south, all of which can impact not only the cash flow distributions but the return profile of the overall deal.
In conclusion, choosing the right multifamily investment strategy depends on your risk tolerance and financial goals. By understanding the different types of deals available, you can make an informed decision that aligns with your investment strategy.
Considering investing in a value-add deal? Make sure to read my free guide on the four key questions I ask myself before getting involved in a value-add deal!
