Top Ten (10) Reasons Why Multifamily Real Estate is a Good Investment
Let’s admit, multifamily real estate is an effective investment not only in terms of the risk that you are about to take but also of the benefits that you will reap in the future. We have listed the ten most efficient reasons why multifamily real estate is a good investment:
- Cash flow. Cash flow is king and even more efficient than cash flow is a passive type of cash flow. The reason being, it generates a taxable document more commonly known as K-1. This type of document can be utilized to show passive losses. If you are in an investment that does not pay any type of distributions in the said taxable year that you are obtaining your k-1, these losses can be presently carried forward and back based on the law also known as the “care Act”. If you are a full-time in the real estate industry, or someone like a real estate agent, contractor, developer, builder, wholesaler, home flipper, and a lot more, you can truly benefit from this. How passive cash flow can affect is that those k-1which include passive income can offset your taxes that you are paying on your active real estate income. Being able to lessen your taxes is an efficient way. If you have ever wanted to retire early or if you ever want to make your money work for you passively, employing investing in multifamily units is a concrete way to do this. And the reason why it is concrete is that it is based on physical assets as compared to paper assets. You can also generate income from other sources of investments such as investments in gas and oil. However, there are other additional advantages that you will not obtain.
- Principal Down Payment. Your tenants are practically paying your mortgage and fundamentally also covering your interest. SO when you purchase a multifamily unit with 90% or full occupancy, cash flows at the beginning and essentially your tenants are paying down the loan that you purchase on the property and having the grad time to collect the extra cash.
- Appreciation concerning forced appreciation. Look for heavy value add assets. That there are a lot of units that are not renovated because expenses are rocket high. Also, management costs a lot. To add, the property is not being operated as a business where you are taking advantage of profit centers such as parking, laundry, and more. Forced appreciation, on the other hand, means taking measures to add value to the property within a limited period. That normally happens over ten (10) years or more. Real estate is cyclical but surely, it will appreciate as time goes by. So with the incorporation methods to add value, force appreciation is bound to happen.
- Multifamily real estate investment is an investment into a hard asset and not a paper asset. It is a known fact that hard assets do not disappear overnight. They do not follow the trends in the volatile stock market that is dependent on consumer confidence. The real estate industry does not trend with consumer confidence. If the building catches fire, as long as nobody is hurt, insurance will take care of all the legal claims as well as the cost of rebuilding. Sometimes, rebuilding, it increases the value of the property even more. Safe to say, one should always think of ways on how to create lemonade out of lemons.
- You gain more tax benefits from cost segregation. This is also about the inherent benefits of depreciation. Cost segregation will give you the freedom to gain more advantage of bonus depreciation. This depreciation emanates from the tax cuts and JOBS Act which mean that you are able to depreciate up to 100%. Your real property assets naturally depreciate overtime in the initial year since you purchase properties that are not new and need to be renovated. We get to avail of this regularly.
- Multifamily real estate investment is the most stable asset class. Did you know that multifamily real estate beats Self Storage industries during a recession? You can also add to this by looking in recession-resilient markets. For those people fortunate enough to live in Dallas, Texas, the latter is being regarded as the number one most recession-resilient market.
- You become part of the multi-million dollar project that you think you cannot possibly be a part of your lifetime. One good example is a property in Houston, Texas that was closed last February. It was a whopping 23.3 million purchase prices. Offerings are syndicated together, giving investors the chance to take part in this huge project which is not going anywhere. The bigger the deal, the lesser the risk will be involved. Say you have vacancies, there is less impact with a lot of units.
- Multifamily real estate is an excellent investment because we buy C-class or workforce housing. It differs for each multifamily class. But C class is a lot more efficient. This is an excellent investment because you are not dealing with D Class apartments. D class complexes have a lot of deferred maintenance. And it would surely take a long period and tons of headaches and very complex property with a significant amount of risks involved. It also needs a lot of renovation. We pay close attention to 40-year old C class properties which have a lot of deferred maintenance; vintage. But we can look for properties that don’t need a lot of renovation and still can generate more income. In this class of assets, there is no supply. Meaning, nobody is building this anymore. However, the demand is high since workforce housing is for individuals who work in industries like huge power companies, manufacturing plants, or large corporations. You cannot build a property. That is a 1970s vintage with present building standards.
- The types of loans that you can take out in terms of a multifamily property are different as compared to the loans that you can take out on a single-family property. When you are getting loans that are around 750,000 and more, your deals can be financed with a government back to Freddie Mac or Fannie Mae Loan. These are more commonly known as non-recourse loans. Non-recourse loans are good since if something happens with a project where it is on a failing end, it just simply go back to the bank. It does not result in the entire investors having their assets gone after. The other significant reason is your capability to utilize somebody else’s money to finance your deals. Bigger leverage equates to more cash flow available and since inflation changes from time to time, you do not lose the time value of money on your present cash flow. You don’t become illiquid. Those are basically the largest challenges in real estate. To add, something that is truly interesting that others do is structuring an investor’s capital in the deals and recognizing it as preferred equity. This means that they get paid a percentage return on their money each month. Just like a banker would but they don’t have a lien on the property. Multifamily real estate is also enticing since the returns are basically high so that it exceeds inflation.
- You can use a 1031 exchange to come up into apartment syndication. 1031 can be used to level up into a bigger deal or multifamily deal. But if you utilize 1031 exchange into syndication, you are one of the main owners and you get bigger tax benefits and income in the long run. Depending on your arrangement with the sponsors and other co-owners your tenancy in common into syndication may mean that owners will have to do minimal work.
- BONUS!!!!! Multifamily Real Estate is the economies of scale. So you can be able to purchase supplies in bulk and save a significant amount of money on them. We can also avail of the benefit of up to 100 units per property manager. So you pay the same salary, to have one person operate and manage your multifamily property. Regardless of the number of units, an owner will need a full-time manager and a leasing agent. Basically, the cleaning agent is paid on a commission or hourly basis or a combination of both. So the bigger the building is, the less expensive necessary functions become including things such as internet contracts and huge cable contracts. One can renegotiate for a better rate since you are essentially a part of the city and a very huge customer.
Truly indeed, there are tons of more advantages to investing in the multifamily real estate industry like enhancing the branding and value of the community having after-school care services for kids, educational schemes and systems, and a lot more. If you are eyeing engaging in multifamily real estate investment, there is never a better time to start than today!
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