Passive Investing: 5 Common Mistakes in Multifamily Deals

Passive investing in multifamily real estate offers compelling rewards, but missteps can undermine returns. The first mistake is neglecting sponsor due diligence. Failing to verify a sponsor’s cycle-tested experience or portfolio health can lead to poor performance. Request performance data and check leverage ratios to ensure they prioritize risk management. A weak track record or high watch list count is a red flag.

Second, chasing high projected returns without scrutinizing assumptions is risky. Overly optimistic rent growth or low vacancy rates may inflate forecasts, hiding vulnerabilities. Review cash flow projections carefully, ensuring they’re grounded in market realities and stress-tested against downturns. Conservative assumptions reflect a sponsor’s discipline and reliability.

Third, overlooking tax implications can erode profits. Multifamily investments offer powerful tax benefits, like depreciation and 1031 exchanges, but failing to leverage them is a missed opportunity. Work with a tax advisor to optimize deductions and deferrals, and choose sponsors who structure deals for tax efficiency, such as through cost segregation or Opportunity Zones.

Fourth, underestimating market risks, such as oversupply or rising interest rates, can disrupt cash flow. Research local market trends and favor sponsors who diversify across geographies and property types to mitigate volatility. Finally, misaligning with a sponsor’s strategy—value-add versus core—can mismatch your risk tolerance. High-risk value-add deals may not suit conservative investors seeking stable income. By avoiding these mistakes through thorough research, realistic evaluations, and strategic alignment, you can maximize the potential of your multifamily investments.