Options abound, today’s investors are flooded with opportunities for investing. Among these opportunities real estate has taken the front row and filled it with opportunities. This is due to the many methods investors can use to profit. Note buying, land, fix and flip, ground up development, buy and hold, short term rentals etc. From this family of opportunities, Multifamily has emerged as the darling child- who says you’re not allowed to have a favorite? Maybe you’re wondering what is the one reason investors are so drawn to multifamily? Well, here are 7.
Cash Flow and Appreciation – Money you can bank on
Did you have a piggy bank as a child? Or a place to put your savings in? Then, one day after you’ve finally saved up enough you break it open and go on a spending spree? Imagine if your piggy bank also paid you monthly direct deposits, checks in the mail if you’re old school. Those monthly payments would be cash flow. Multifamily investors get income from rent payments, after expenses are deducted the remaining funds are their monthly cashflow. This is what I call money-now. Why? Because you can enjoy it now! Sweet!
Now imagine that you had put $100 into your piggy bank. Years later when you break it open you find $1000. Time and patience have allowed your initial investment to naturally grow in value. This is called appreciation. Multifamily investors get this when their property increases in value due to value of the neighborhood increasing over time or based on inflation. This is what I call money-later, because you must wait to get it and truly appreciate it.
The best part about getting money now and money later is the tax advantages of Multifamily allow you to enjoy all of it!
Tax Advantages – Make the IRS Say Uncle
One of the most sought-after benefits of owning multifamily is the tax advantage. As a multifamily investor you can defer taxes on your earnings through depreciation write offs, repair write offs and a myriad of write offs for costs associated with owning multifamily. These write offs show up as losses on your tax return, potentially cancelling out most if not all the profit you made. These taxes will never have to be paid unless the property is sold. Even then you can continue to defer your taxes via 1031 exchange. Remember all that cash-flow we talked about earlier? You can keep all of it. For many tax-burdened high-income earners and hard-working professionals this alone makes the investment worth it. After all the effort you put in to earn your income, I’m sure you can think of better ways to spend it than the IRS.
Risk Reduction, Cost Savings and Convenience
A multifamily property will share common expenses and income. Because this property has multiple units, you’re not dependent on one single unit to cover all your expenses or to provide you income. So, even if you have a vacant unit, there will still be income from the other units to help with payments. This reduces the risk that you will be left covering the debt payments for your rental property out of pocket.
Everyone loves running errands, especially when you must spend all day going to multiple different places to get everything done - Not! Having all your rentals in one multifamily apartment building also facilitates management as you can send your contractors to one place instead of multiple. This saves you on time and contractor related costs.
Multifamily Multiplier – Apartment Communities
The benefits just mentioned apply to small residential multifamily investors. What if there was a way to multiply them? Add some zeros to the end of your financial statements and paychecks? Multifamily apartment communities multiply all the benefits of small multifamily but also give you more control over the benefits as well. Scaling from small multifamily to larger 80-100+ unit apartment communities may seem daunting but with a host of compelling reasons many investors are making the upgrade.
Economies of Scale
When we talk about multiplied benefits, economies of scale are what allow this. Large multifamily works on a larger scale that allows for wholesale pricing and major benefits from small changes. Imagine if you had a single-family rental. You fixed up the landscaping maybe put a pool in the backyard, and you can get $100 more per month in rent. If this was a 100-unit apartment community, you could still put in one pool. However, the benefits would be shared between multiple residents and still achieve similar rental increases. You would now be making $100 X 100 = $10,000 more in rent/ month for the same amount of work.
This also works with expense reduction. If you install one water efficient toilet or faucet you may not notice a significant difference in your water bill, but if you do 100+ there will be a noticeable impact.
There are also additional benefits of cost reduction because you are buying at a wholesale price. Contractors and vendors will reduce their costs because you are bringing them more business. This cost savings will effectively reduce the expense incurred per unit in the apartment community.
Cost Segregation/Bonus Depreciation
Cost segregation and bonus depreciation are methods of deferring tax that work best on larger multifamily apartment communities. A cost segregation study evaluates an entire apartment community and determines a depreciation schedule for each component. This along with bonus depreciation help you to maximize your tax write offs in the initial years you own an apartment community. Because of the cost to do a cost segregation study it may be prohibitive unless you are dealing with large multifamily where the additional tax savings justify it.
Third Party management
Apartment communities have larger profit margins than small multifamily. This allows a budget that includes property management services. Property management companies allow investors to be more hands off. Cost for these services are often tied to the income collected at the property. Single family and small multifamily investors may be used to fees of 10-15% of income or higher. That’s a large chunk of your monthly cashflow – ouch! Remember economies of scale? Property management fees for larger multifamily can get as low as 3% so you don’t have to self-manage to make a profit. Now you can really enjoy some long-distance real estate investing. Island beach vacation here we come!
Apartment communities are valued based on the income they can potentially generate. By increasing the net income generated, you increase the value of the apartment community. This can be done by lowering expenses or increasing income as rents increase. By decreasing expenses (negotiating vendor contracts, fixing leaks etc.) or increasing income (higher rents, fees, affiliate programs etc.) you can increase the net income the apartment community generates. This simultaneously increases the value of the apartment community. Because you are actively taking steps to create this change in value, rather than waiting for natural changes in the economy or market, you are forcing appreciation. The beauty here, is you can create millions of dollars in value in months to years and all the tax advantages of investing in a multifamily apartment community can help you to cash out and hold on to as much of that value as possible.
Make the upgrade
Large multifamily not only allows you to take advantage of all the benefits of real estate investing but also multiplies them. Because of the larger scale, there are more factors that can be fine tuned and adjusted to maximize tax benefits, cash flow and appreciation. There is also the added benefit of built in management systems that allows you to be more hands off. If you have not yet considered large multifamily then maybe it is time to think bigger and make the upgrade!
This article was originally produced for our educational platform InvestUp! and is being reproduced here for the benefit of our readers on this website.