When investing in a Multifamily property, you have the option of investing either actively or passively. A typical deal is structured with General Partners (or GPs) that are made up of active investors. It can also be structured with Limited Partners (or LPs) composed of passive investors. Let’s look a little more on what these mean:
Active Investing
Active investing in Multifamily involves finding a property, securing financing (debt and/or equity), and managing the investment to ensure returns for investors. As an active investor, you are in control of the deal. As such, you have to adhere to SEC regulations and keep the interests of your investors in mind. If the deal requires a loan (which, in large Multifamily, is always the case), you also provide the loan guarantee. There is a lot of time commitment and involves a lot more risks. You are responsible for the execution of the business plan and all investor communication.
Passive investing
Passive investing refers to when you are not directly involved with managing the investment. You would rather have someone you trust to serve as the point person (or a deal sponsor or syndicator in this case) who handles all aspects of the investment process for you. You invest your money alongside other investors in a deal by signing legal documents. The deal sponsor would deploy those funds to acquire the asset and turn it into a profitable cash flow that you then get to enjoy as passive income. Moreover, as a passive investor, you still get to benefit from cash flow, tax benefits, and the share of profits from the sale of an asset – all this without spending any time on the investment.
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