The properties may be larger, but many of the principles behind creating value are surprisingly familiar.
When I first became involved in multifamily investing, I expected much of it to feel different from the residential development work I had been doing for years. In many ways, it is. The financing is different. The way properties are valued is different. Operations matter enormously. There are different investment structures, different metrics and often much larger teams involved. But the deeper I got into it, the more I began recognizing something familiar. The properties may be larger, but many of the fundamental questions are the same. Where is the value? What isn't working today? What can realistically be improved? What will those improvements cost? And does the opportunity justify the risk? Those are questions I've been asking for years.
Creating Value Instead of Waiting for It
One of the most important lessons development taught me is that I don't particularly like an investment strategy that depends entirely on hoping something becomes more valuable. I would rather understand how we can help create the value. In residential development, that might mean buying a poorly designed house in a great neighborhood, changing the floor plan, improving its connection to the outdoors and creating a finished property the market values substantially more. Multifamily has a similar concept, although the levers are different. Instead of moving a kitchen or improving the flow of a living room, a multifamily business plan may involve renovating units, improving operations, addressing deferred maintenance, increasing occupancy or finding other responsible ways to improve the property's net operating income. That distinction fascinated me when I began learning more about the asset class. With multifamily, increasing the income produced by a property can directly influence its value. This is one reason value add strategies play such an important role in multifamily investing. My beginner's guide describes this concept as forced appreciation, where improvements to the property or its operations can increase income and therefore potentially increase the property's value. The scale is different. The principle isn't. Find unrealized value and determine whether there is an intelligent, financially responsible way to unlock it.
A Good Property Doesn't Automatically Make a Good Investment
I've also learned to separate the quality of a property from the quality of an investment. You can fall in love with real estate. I've done it. A beautiful building in a great location can immediately get your attention. But eventually the numbers have to take over. What are we paying? What assumptions are being made? How much capital will the business plan require? What happens if rents don't increase as projected? What happens if financing becomes more expensive? What is the exit strategy? And perhaps most importantly, what happens when something doesn't go according to plan?Development has taught me that the spreadsheet is rarely wrong because the math stopped working. It is usually wrong because one of the assumptions going into the math was wrong. That's why I have become increasingly interested in the assumptions behind an investment rather than simply the projected return at the bottom of the page.
The Operator Matters as Much as the Opportunity
This became one of the biggest lessons for me as I expanded into multifamily. I have extensive experience developing and renovating properties, but multifamily requires its own operational expertise. Rather than pretending otherwise, I've chosen to work alongside people with deeper experience operating and structuring larger multifamily investments. I think investors should look at opportunities the same way. Don't evaluate only the property. Evaluate the people responsible for executing the plan. My beginner's guide recommends looking closely at a sponsor's track record, business plan, market assumptions, fees, communication, timeline and exit strategy. It also encourages investors to understand how the sponsor plans to respond when a project underperforms or unexpected challenges arise. I think that last question is particularly important. Almost anyone can explain how a deal works when everything goes according to plan. Experience becomes much more valuable when it doesn't.
Risk Should Be Understood, Not Hidden
Maybe this comes from spending so many years investing our own capital into projects, but I'm naturally skeptical when an investment is presented primarily through its upside. I want to understand what can go wrong. Interest rates can change. Renovation costs can increase. Occupancy can decline. Markets can soften. Timelines can stretch. Multifamily doesn't eliminate those risks simply because housing is a necessity. The job is to understand them, underwrite them realistically and decide whether the potential return adequately compensates investors for taking them. That's a very different conversation from simply asking, “What does this deal pay?” In fact, the section of my guide I consider among the most important has very little to do with projected returns. It lays out ten questions a beginning investor should ask before committing capital, including questions about sponsor experience, fees, risks, reporting, hold periods and exit strategies. Those are the conversations I believe investors should be having.
Why I Wrote a Beginner's Guide
As I spent more time around multifamily investing, I also realized how intimidating the language can make the asset class appear. GP. LP. Preferred return. Cap rate. IRR. Equity multiple. Cost segregation. For someone encountering those terms for the first time, it's easy to assume multifamily investing is something reserved for institutional investors or people who have spent their careers in commercial real estate. It doesn't have to be. That's why I put together The Beginner's Guidebook to Multifamily Investing. It is simply meant to give someone considering passive multifamily investing a starting point: how syndications work, what the terminology means, where returns may come from, what the risks are and, most importantly, what questions to ask. The guide was written specifically for people interested in understanding passive investing before deciding whether it belongs in their financial lives. I'm still a developer at heart. Whether I'm looking at a single family home, a ground up development or a multifamily property, I keep coming back to many of the same questions. Where is the opportunity? How is value going to be created? What are we paying for that opportunity? Who is responsible for executing the plan? And what happens if we're wrong?
The buildings may change. The discipline shouldn't.
Interested in learning more about multifamily investing? I put together a simple guide for those who are just getting started.
