The 4 Ways That Multifamily Real Estate Syndication Pays You
When looking for an investment one of the main criteria should be how hard your money will work for you. Passive Investing in multifamily (apartment) real estate syndications is a way to give your money a job so you don’t need to work harder at your current job. Not only does investing in multifamily syndications put your money to work – it gives your money 4 jobs. That’s 4 income streams - passively. Your money will bring you 4 paychecks with each investment, in this article we discuss how.
Cash Flow
One of the first income streams you might think about is the on-going cash flow you get from investing in an income producing property. Investing in multifamily apartments provides monthly cash flow from the residents that are renting the apartment units. After all expenses and loans are paid the remainder is profit. This cash flow is for the investor to keep.
For example, imagine you had a $100,000 house for which you rented out at $1,100 per month. Every time you got that $1,100 you would have to pay $300 for miscellaneous expense, repair and maintenance and hold a reserve for future expenses. Additionally, you would pay out another $600 to cover loan payments and taxes and insurance. This would leave you with $200 profit. This is the cash flow of the property which you can use to your discretion.
One of the wildly powerful things about this cash flow is that if you invest in the right deals you can have an infinite return on investment. Depending on the business plan of the syndication you invest in, the syndicator may renew the loan on the property (i.e. refinance) and in the process of this refinance return to you all the initial capital that you provided. This would mean that you no longer have any capital at risk but are still getting on going cash flow returns. When you do the math even if you were to only get $1 per month that would be an infinite return on investment as you have no capital at risk in the deal.
Equity 1.0 - Principal Pay down
Most apartment complexes and investment properties are not bought in all cash. There is often about 20-25% of investor cash used as down payment with the remainder of the cash for purchase coming from bank loans. The total of this bank loan is called the principal. As the property is held each month there is a required debt payment to repay this bank loan often referred to as your debt service. This debt service will be allocated to several things with a portion going to interest payments on the loan and the other portion going to payment of the outstanding principal.
For example, if you bought a $100,000 investment property and paid $25,000 cash and got a 30-year bank loan at 5% interest rate for the remaining $75,000 your debt service would be a monthly payment of $403. During month 1 this $403 would be $313 of interest and $90 of principal (i.e. you are reducing your outstanding loan by $90). The longer you hold the property the lower the interest portion becomes (as there is less loan outstanding) and the higher the portion allocated to principal becomes.
If the investment property stays at the same value, there will be an ever-widening gap between the property value and the outstanding principal balance on the loan. The difference between the value of the investment and the outstanding loan on the property is called equity. This equity is added to your total net-worth. Equity is the unrealized value in an investment; once the property is sold this value will be realized and you will be able to share in the profits. Add a few zeroes to your loan balance and you can see how powerful this principal pay down can be. Decreasing the outstanding loan value is one way to increase equity. The other method is to increase the value of the property. Equity 2.0.
Equity 2.0 - Appreciation
Appreciation refers to the increase in value of an asset. This can happen naturally via increased market demand for assets in that city or assets of the type that you currently own. There is also a natural increase in value that comes from inflation of the overall economy. If you purchase a property in a great market, your value increase will often outpace that of inflation.
As a word of caution - appreciation is not guaranteed so it is better to view appreciation as icing on the cake that are all the income streams from your real estate investment.
There is a method of investing however that provides a high probability that there will be appreciation in value of your investment. Syndicators of multifamily apartments “Force Appreciation” in properties via operational, financial and physical upgrades to a property. These upgrades lead to related increases in the desirability and value of the property. The term forced appreciation comes from the fact that this appreciation occurs based on the intentional efforts of the deal syndicators. Being able to force appreciation is one of the many benefits of investing in multifamily apartment real estate asset class.
Taxes
One of the biggest draws for investing in real estate are the tax benefits. The US Tax Code loves real estate investors. Real estate is the only investment out there that allows you to earn significant amounts of passive income while reaping even larger tax benefits.
One of the biggest tax advantages, depreciation, allows you to take deductions on your taxes even though you did not spend or lose any money. Depreciation is a means of accounting where you write off the value of an asset (such as your multifamily investment) over a period to record a theoretical decrease in value for wear and tear on the asset. These are often called “paper losses” as they are only losses on paper. In real life you are still earning all the streams of income mentioned above. That means you are getting regular cash flow and your investment is increasing in value but as far as your taxes are concerned, you ended up with a net loss and won’t have a tax liability. Even better, depreciation is often great enough that you will have left over losses to cover other passive income that is not as tax advantaged as real estate. So even if you don’t need the extra money from real estate you may want to add it to your portfolio for the simple fact it will help reduce taxes on other passive income in your portfolio.
If you thought “interesting, but that doesn’t get me overly excited” – how about never paying taxes on your income and passing on all that equity to your children tax free? Yep, real estate allows you to do that. This is only the tip of the iceberg of the tax benefits provided by real estate. When you add all these tax advantages together you may ultimately reduce your tax liability down to 0. Even better, you may receive so many tax benefits that you are now able to get a tax refund (or a larger refund if you already receive refunds)!
If those four income streams weren’t enough for you, we decided to open the bag and give out a couple more bonus streams of income.
BONUS STREAMS OF INCOME
Social Capital
Investing in real estate syndications connects you to experienced syndicators. This allows you the comfort of investing in real estate without the headaches of being a landlord while leveraging the professional experience of the deal sponsors. Further because you are partnering with other investors you can collectively acquire better assets than if you tried to invest on your own. Syndications, which have historically been solely private investments prior to crowdfunding regulations, were only available to investors if they knew someone that was a syndicator. Even with these regulatory changes the best real estate deals remain very much in a closed circle amongst private relationships. To get the best deals it’s still about who you know. Once you start investing in real estate syndications you will get to know more syndicators and as your network grows you will have more opportunities to invest in deals and grow your net worth. Further, via these networks, you may meet other passive investors who are high caliber individuals in their respective industries. Whether you are a business owner that is interested in working with others or looking to be client you will add another dimension to your network to help you in achieving your goals.
Time
You’ve heard this phrase before – “time is money.” We fundamentally understand this concept if we look at any professional service provider such as a lawyer or accountant that bills their services by the hour. If you have ever had work done on your house or apartment you know there is a charge for materials and labor (i.e. effort over time). Also, if you have ever been running late for an event or had to travel a long distance it’s likely one of the considerations you made in choosing your mode of transportation (and your willingness to pay the cost of that transportation) was the amount of time. Time is money; that is clear.
Passive investing in real estate allows you to not only get paid in the ways that we previously covered above but you also get paid in time. How’s that? When you invest passively in syndications the amount of work you do does not impact the amount of return you receive. That is because passive investors don’t do any of the work; as a matter of fact, as a passive investor you are not expected to do any work. Passive investors help to provide equity during the acquisition of the deal and afterwards they sit back and collect on all the streams of income that real estate syndications provide – including more time. Since you don’t need to work harder or spend any more of your time to earn more income that provides more freedom to do what ever you want with this new-found free time. You can spend this time in leisure, pursuing your passion, traveling the world, growing your own business or what ever else you can think of. Just imagine that each time you passively invest in a real estate syndication you are cashing a check at the time bank. Spend it how you want.
Passively investing in real estate syndication is a highly profitable venture for you and for the generations that come after you. You can earn via cash flow, principal pay down, appreciation, taxes, social capital and time. True wealth is gained by having various streams of income, it’s no wonder why real estate is one of the most powerful wealth building machines.
The four ways multifamily real estate syndication pays you are:
1. Cash Flow
2. Principal Pay down
3. Appreciation
4. Taxes
5. Bonus: Social Capital
6. Bonus: Time
At ARE Holdings Group we sponsor and manage syndications that allow passive investors to have access to real estate investment opportunities with high cash flow. These passive investment opportunities may be the safe house for the next recession, whether that is in one year or ten.
If you are ready to invest in real estate or would like more information please visit the ARE Holdings Group contact page or text “Why Real Estate?” to (516)-519-3869 so we can match you with the investment opportunity that best meets your needs.
DISCLAIMER: ARE Holdings Group, LLC and it's affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own personal tax, legal and accounting advisers before engaging in any transaction.