Rich People Put Their Money: Multifamily Real Estate Investments (part 1)

Based on statistics, almost eighty (80) percent of millionaires attribute their wealth to the realm of real estate investment. Such individuals are living the good life of generating income from real estate. Incorporate this with unimaginable experience of unpredictable, disappointing stock markets, and you will obtain a significant amount of people realizing they practically have zero control over almost all of their investments and of course, their future savings in their pocket. People are sick and tired of following 401k stuffers and a lot have begun at why a lot of wealthy people own good real estate properties.

In this article, we will dissect the figures in their simplified form and yet rarely talked about the realizations behind the wealth-generating capabilities real estate investment possess.

Who does not want to pay close attention to the liberty and wealth real estate can actually give you? Of course, everybody loves it so much that almost all forgot to explain the ins and outs of it. The gap in education leads people to impulse decisions in not knowing that even some types of investment strategies in the real estate industry do not carry advantages for some.

Listening to meetings and going to meetups, or even reading articles, you always hear about individuals generating wealth and their success stories and accomplishments through investing in the real estate industry. What we always tend to forget is how and why owning a real estate investment is able to make your dreams turn into reality so much better than any other investment strategies like flipping, private lending, or any other type of investing.

Focusing on Multifamily Real Estate. When talking about real estate investments, one should pay close attention to multifamily real estate or apartment complexes because of the control it gives in specifying the investment outputs. Control, taxes, and debt are considered to be some of the strongest components in real estate. For the average investor, leverage is practically utilized in real estate, but not in private lending or even stocks. Furthermore, the owners of the real estate investment properties as well as the IRS might be best of friends because the IRS has made a lot of guidelines on investor’s advantage.

There are tons of useful information wrapped in this article. You have to read this article and nurture the information by heart. If you are alien to a specific term, stop and look it up. Before you do the math, learn to understand important concepts. Even though you will be faced with tons of numbers, it is only the basic addition, subtraction, multiplication, and division. So do not let the math overwhelm your guts in engaging in real estate. As soon as you have a good grasp of all the words and figures behind it, you will surely know how simple it is to generate wealth in real estate and why rich people contribute to relating their financial liberty to real estate investment. The most engaging way to illustrate the truth is through examples and figures. Instead of looking at the same old best results, we are going to pave our way down into why all these billionaires point their wealth to real estate and particularly multifamily and other commercial real estate investments.

Say, for example, you shell out a $200k down payment on a total purchase price of $1 million multifamily building figured at an 8% cap rate which is very attainable. This will give you an $80k NOI or net operating income. When you borrowed the $800k from the bank, they will lend it out for a minimal 4% interest rate on a thirty-year amortization. This simply means that your mortgage on the initial year will be at $45, 832.00, out of which, $14,088 is the principal. The rest is interest. That will leave you with $34,168.00 in your cash flow or pre-tax cash on cash return at a rate of 17%. So if your cash flow at @34,168.00, do you pay tax based on the same? Of course not! Another advantage of leverage and real estate is the depreciation tax benefit. This is one benefit that the IRS showcases to the investors who are in the real estate industry. Even though you only shell out 20% of the $1million dollar property, you will acquire ALL the depreciation benefits.

It is a known fact that multifamily apartment units are depreciated over 27.5 years, which simply means you get to depreciate the value of the property. You also have to be reminded that the value of the building is not equal to the value of the properties because the building sits on land, and the land also has a specific value. The IRS will not let you depreciate the land. A basic percentage of a property value that is diverted to land value is about 20 percent. So, in this example, it will be around $200k. This will leave you about $800k of construction value to be depreciated over the next 27.5 years, or $29,090.00, yearly.

So what does this imply? It means that you pay almost nothing on that 34k cash flow you made on the property You actually have a taxable principal of $19,166 and a $14,088 portion of your mortgage payment less than $29,000.00 depreciation. We then add the principal amount of your mortgage payment since it is not taxable and then subtract the depreciation we stated above.

And because you were able to come up with $200k down on your property it is safe to assume you are doing financially well. Having said this, it is also safe to assume that you belong to the 35% tax bracket. And because the taxable gain bracket is 35%, $6,708.00 will then be deducted to your taxable gain of $19,166.00 in favor of the IRS. Now leaving you with a whopping $27,460.00. It simply means that the after-tax return is around 13.7%.

This is the point where a lot of individuals close their minds and say “my financial specialist says I can earn a good 8-9 percent in a mutual fund, and those have no lessees, no property manager means no complexities in management. SO you think that that peace of mind will is not worth owning a property? I don’t think so. There are main parts to this puzzle that the rich individuals utilize that a lot of people give up at this step never witness.

 

Introduction To CRE Apartment Investing-why do it?

Purchasing an apartment complex can be an excellent investment for an array of reasons. Even newbies can purchase an apartment complex especially if they abide by the so-called 10-step guide. Also, be aware of the seven common mistakes rookie real estate investors make and know how to stay away from them (previous article from us).

 

Apartment investing may sound like a huge undertaking, especially for people who are relatively new to the real investment realm. Although purchasing an apartment complex is a method that should be taken seriously, it offers an array of advantages that simply cannot be taken for granted. 

 

Is purchasing an apartment complex an excellent investment? Just like any class of investing decisions, there are advantages and disadvantages connected with purchasing an apartment that could be given consideration.

 

Investing in apartment buildings supplements an array of advantages that are extraordinary when compared to investing in single-family units. Recurring rental income every month for several units aids in increasing growth in income, while splitting maintenance fees lower the cost on each unit. To add, investors are given the freedom to spread the risk to all its units. When a tenant moves out from a single-family unit, the vacancy rate is entirely 100 percent. In contrast, when one tenant moves out from a ten-unit property, the vacancy rate is a fraction of the total. Further, the owner has the liberty to solidify the potential ADDED  income of the property by incorporating amenities that are paid for by tenants, like vending machines, laundry, and the like.

 

Investing in multifamily units, however, are not without a possible disadvantage. Owning a property with multi-units is the same with the intensive type of management, such as dealing with a turnover of a tenant, or dealing with maintenance issues as well as repairs. People eyeing in multifamily investing should ask themselves if they are really prepared on becoming a landlord. If the answer is “no”, perhaps hiring a property manager or getting the services of a property management firm is the most efficient solution (what we do). Lastly, some may not take buying an apartment into consideration because what can be perceived as the prohibitive purchase price. But it should be stressed that when it comes to investing in multifamily real estate units, banks tend to look more at the potential financial wealth of the property instead of an apartment investors’ personal financial standing. In the case of multifamily units, the value of the building is a function of both market value and prospective income. Having said this, financing an apartment multifamily complex in some cases may be a lot more accessible than getting a loan for a single-family real estate investment.

 

Commercial Retail Space Unit vs. Apartment Building Rentals

This will only matter for those eyeing to take the plunge into real estate investment to also wonder about commercial retail spaces as well. Both sides can have an idea of needing a significant expense for acquisition, while others may believe that a commercial building will bring in more income. It is imperative to carefully balance the pros and cons of both investing features before selecting and going forward.

 

Initially, some may assume that it is a bit easier to look and manage tenants in the commercial space. However, because of the present economic downturn and those brought about by the pandemic, a lot of small retailers are being squeezed out by large scale ones and online retailers. Although a business may occupy a retail space for a longer period of time, vacancies are likely to be much harder to fill. In contrast, the demand for residential rental units is rising in demand. 

 

This is practically the case in concentrated markets where it generates more financial sense to rent instead of purchasing, or where house buying is not attainable. Lastly, investors should also take managing turnover into considerations in the retail industry can be a bit expensive. When a business moves in, they have to figure out space according to their preference. As with any scenario, investors should mull over prospective downfalls linked with any type of investing niche.

 

Purchasing an apartment vs. purchasing a Condominium

A lot of people actually think that owning a condo as well as an apartment is just similar, but they are basically very different in a lot of ways for both homeowners and real estate investors. When talking about condominiums, the buyer owns the interior space of the unit itself, while the exterior spaces are actually owned in common, such as parking lots, stairs, grounds, pools, and the like, homeowner’s association. Those who opted to invest in condominiums are expected to pay monthly dues and face stricter rules that might make remodeling, renting out, or reselling the unit. In comparison, real estate investors who own the apartment unit will basically own the entire structure, making them free to enhance and rent out units as they please. 

 

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