Accredited investors have many off-market investment options that other investors do not. One such option is a multifamily fund, a powerful investment vehicle that allows investors to diversify their portfolios, build passive income, and reap numerous tax benefits. Read on for an overview of multifamily investment funds along with links to helpful resources for those looking for more detailed information.
What is a Multifamily Fund?
A multifamily fund is an investment that pools capital from multiple investors to acquire and manage multifamily real estate properties, such as apartment complexes. These properties can be anywhere in the country, though most firms specialize in certain markets. Multifamily funds are typically structured as private equity funds managed by experienced real estate investment firms. These funds generate a return for the sponsor and investors through a combination of rental income and the appreciation and sale of the property.Multifamily funds allow individual investors to gain exposure to the multifamily real estate market without having to purchase and manage properties themselves.
How Does a Multifamily Fund Work?
While multifamily funds will vary in their structure and timeline by the firm, you can typically expect them to work in this way:
- The fund sponsor (investment firm) raises capital from individual and institutional investors to create the fund
- The fund then uses this pooled capital to acquire promising multifamily properties that align with the fund's investment strategy
- The properties are managed by the fund sponsor to maximize occupancy, grow rental income, and increase the properties' value
- Returns generated by the properties flow back to the fund and are distributed to investors
- After a set holding period (often 5-10 years), the fund sponsor sells the properties and returns the proceeds to investors
Again, this will vary depending on the firm but in most cases, this is the process you can expect to follow. As a passive investor, you will get to invest alongside an experienced firm and benefit from the appreciation and sale of the property without having to be actively involved.
How Multifamily Funds Generate Returns for Investors
Multifamily funds aim to provide investors with returns through multiple avenues:
- Rental income: As tenants pay rent, this income flows back to the fund and is distributed to investors
- Property appreciation: The fund works to increase each property's value through strategic renovations, operational improvements, and increasing rents. This appreciation grows investors' equity in the fund.
- Profits from property sales: When the fund sells its properties, any profits are returned to investors, hopefully at a substantial gain from the original purchase prices.
Multifamily funds also pass through tax benefits, such as depreciation write-offs, to investors which can help enhance after-tax returns. While this does not add to your returns, it can be a major benefit come tax season.
Who can Invest in a Multifamily Fund?
Multifamily real estate funds are alternative investments not registered with the SEC making them open only to accredited investors. Accredited investors are investors with:
- Income: You need an annual income of at least $200,000, or $300,000 if combined with a spouse’s income. You must have had that amount for the past two years and it needs to be sustained from year to year.
- Skills: If you work in investments professionally (as an advisor or broker-dealer for example) or hold a valid Series 7, 65, or 82 license you can qualify as an accredited investor.
- Net Worth: If you have a net worth of $1 million or more (individually or with a spouse) but this cannot include the value of a primary residence.
You do not need to meet all of these requirements, if you meet any one of these requirements then you quality. Many funds have a required minimum investment higher than other investment options, usually $50,000 - $100,000.
The Benefits of Investing in a Multifamily Fund
There are many benefits to investing in multifamily real estate, here are our favorites:
- Portfolio diversification: Multifamily funds allow you to diversify into the multifamily real estate asset class
- Opportunity for cash flow: With a diversified portfolio of larger properties, investors can enjoy a steady cash flow less vulnerable to individual tenants’ fluctuations.
- Significant tax advantages: Investing in multifamily real estate provides investors with various tax advantages, which can significantly enhance the overall return on investment.
- Hedge against inflation: Rental income from multifamily properties tends to rise with inflation, providing investors with an income stream that keeps pace with the cost of living.
- Invest with an experienced firm: The fund sponsor handles all aspects of acquiring, managing, and selling the properties
This list just scratches the surface, but it should give you an idea of how beneficial investing in a multifamily fund can be.
What to Look for When Selecting a Multifamily Fund
Once you’re sold on the concept of investing in a multifamily fund, now it’s a matter of finding the right one. We recommend looking for the following:
- Experience: Look for a firm with a proven track record and strong reputation.
- Strategy: Look for a firm with a strong plan that covers the markets they invest in, their plans for the property, and exit strategy.
- Target returns and fees: There are no guarantees in any investment, but we recommend reviewing the target returns and IRR that the firm expects.
This gives you a good starting point for evaluating a multifamily fund, though we recommend checking out our guide to evaluating a multifamily firm for a deeper dive into this topic.
How to Invest in a Multifamily Fund
Once you have identified a multifamily fund you would like to invest in, you will then need to:
- Contact the sponsor to learn more about the opportunity and risks
- Review the offering documents
- Pass a check for your accredited investor status
- Wire your funds to invest
And you’re all set! There’s a lot that goes into those four steps though, so if you have questions about investing or wonder if a multifamily fund is right for you then we’d love to chat. At Colony Hills Capital we’ve launched three multifamily funds over the years. Our current offering, Catalyst Fund III by Colony Hills, is open to February 2025 and is accepting new investors. This is a unique opportunity that you will not want to miss. Learn more about Catalyst Real Estate Fund III and take the next step to join today.
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