There are many investment vehicles. My choice? Multifamily. Period. Most people love real estate. The idea of owning real estate, something tangible and historically stable affords freedom, pride, generational wealth, and more. All of us have heard countless stories of people becoming financially free from real estate. And within real estate, multifamily is arguably the best real estate class. Through good times and bad, multifamily rules…
If you look at the history of civilization we can find clues into what is enduring and what is not. Milli Vanilli? – Nope. Shelter? – Definitely. The point is, people will always need a place to live, and given the current population, and their needs, apartments are killing it.
Why? The 2 largest groups in the U.S. are choosing to rent – millennials and baby boomers. There are 72 million millennials in the U.S. and they are choosing to rent. Why? It’s cheaper than buying, they have huge student loans and credit card debt, and they like to have the freedom and choice to move when and where they desire.
Currently, there are 71.6 million baby boomers, ALL of them over the age of 55; downsizing to an apartment just makes sense. In the least newsletter I sent, we spoke about the different reasons that make multifamily the go-to investment.
Let’s dive deeper in this newsletter –
High Yield – Investing in real estate, typically multifamily consistently produces higher yield returns than most traditional investment vehicles. Multifamily beats, stocks, bonds 401k’s, and more. Do your homework. Here is a link to Forbes magazine where Ellie Perlman describes the benefits of multifamily real estate over stocks. https://www.forbes.com/sites/forbesrealestatecouncil/2019/08/07/investment-showdown-stocks-versus-multifamily-properties/#5a01faf37400
Forced Appreciation – Where else can you directly control the value of your investment? With multifamily real estate, you can increase the value of your property by forcing the appreciation. This can be done by increasing the income and/or decreasing expenses. These can take place through physical renovations to command higher rents or in many cases doing a simple comparison of other rents in the neighborhood to make sure you are charging market rents. To reduce expenses simply find where you can cut back or improve operations. The majority of expense reductions will take place in looking at the management team or by implementing RUBS (ratio utility billing system).
Equity through leverage – You can leverage your properties through bank financing. Typically a bank will lend 70-85% of the purchase price of a property… The great part, you get to keep ALL the profits. Crazy!?
Tax Advantages through Depreciation. With multifamily investing most investors will either pay ZERO taxes or significantly decrease their tax liability for a given tax year. How? This is done by utilizing high-level (and 100% legal) tax strategies like a cost segregation study to accelerate the depreciation of a property.
Hedge Against Inflation. With multifamily investing, or any real estate, yes a property will typically appreciate but to help hedge against inflation, operators increase rents up 3% a year.
Scalability – Multifamily is scalable. How? When you run out of funds for down payments on a deal you can – 1) refinance existing properties to pull out cash, 2) leverage partnerships or investors cash, 3) 1031 exchange into a bigger property.
Economies of Scale – When you buy in bulk, everything gets cheaper per unit. From materials to management, you save in bulk. Costco anyone?
Ability to improve your local community – When you purchase a multifamily apartment community, you have control over the types of residents you will lease to. You can enhance the physical appearance of the buildings, the grounds and the apartments. You can offer amenities that increase the mental and physical health of the tenants and the neighborhood. You can also support local businesses by utilizing their products and services for your tenants.
Refi and Roll – Because Apartment buildings increase in value at the same time you are paying down the principal on the loan, you are building equity! You can take this equity out of the building through a cash-out refinance. Use the funds for a down payment on another property.
Wealth Creation and Preservation. Multifamily is not transactional income. This is a business that generates consistent and stable cash flow, and therefore subject to more favorable tax laws. Wealth comes through owning assets that pay you. With multifamily real estate, you are getting paid monthly while at the same time building equity on an appreciating asset. Just ONE of these assets can provide enough monthly income to permit financial freedom for you and the existing physical building can be passed down to your children. Imagine passing down a cash-flowing asset that, if sold, would be worth millions of dollars?
In the end, we all have a choice. We can choose to buckle down now and get serious about the wealth and wellbeing of ourselves, our children, and their children… Or we can continue busting our butts working a W2, getting taxed up the wazoo, and watching Netflix. All for a false dream that our pension and retirement account will be sufficient to maintain our lifestyle and provide for our children when we pass. Not for me, sorry.
