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.
