Multifamily real estate can be an excellent investment option, as it gives investors an opportunity to earn monthly income from rent payments and realize capital gains when the property gains in value. It is also a good option for investors who want to diversify their investment portfolio.
There are several ways to invest in multifamily real estate. The first is to purchase a property outright. An investor can raise the down payment for a property, get a mortgage to cover the balance, and buy the property from a seller. The buyer owns the property and has to oversee all operations, from renovating to marketing, vetting tenants, and collecting rent. Owners who do not have the expertise to operate a multifamily property can hire a real estate agency to manage their property.
Often, however, retail investors do not have the financial capability to buy an entire multifamily property. These investors have two options for buying multifamily real estate: real estate investment groups (REIGs) and real estate investment trusts (REITs).
With REIGs, a company builds or buys multifamily property, then sells individual units to investors. The investors own the units they buy while the company that sold them manages the property entirely. It oversees property maintenance, marketing, and leasing in exchange for a percentage of the monthly rent that tenants pay owners.
REITs are a type of trust where investors pool money together to purchase and operate income-earning properties. The REIT is listed on a stock exchange and trades just like a stock. Investors can buy the REIT and receive periodic dividends, which represent rental income minus operating expenses incurred by the REIT.
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