A lot of people view real estate as an ideal way to accumulate wealth. When most people think about Investing in Real Estate, they envision purchasing and renting single family homes and the effort to manage these properties, or the massive fall in the value of homes in the year 2008. But there are different types of real estate that are available, like multifamily, also known as apartment properties. Multifamily properties provide the opportunity to live there, but they’re an investment that is much more secure. Here are the top six reasons to consider investing in multifamily homes.
Easy to Understand
For starters, multifamily properties are simple to grasp. You’ve probably lived in an apartment or have a friend who has. It is known that the residents pay for rent and other costs for things such as pets or parking that is covered. In exchange for rent, the owner takes care of the property to ensure it’s a clean and secure place to live. It’s easy to comprehend how the property earns income.
It’s also simple to know how property value is determined. A home in a desirable location that is close to restaurants and shops is generally worth more than one in a shabby area. Facilities that are more luxurious, like pools and gym and granite counter-tops in kitchens, usually fetch more than those without these facilities. The more luxurious homes are valued more as they are more appealing to residents which allows them to charge higher rent and earn more. Multifamily properties, just like other enterprises are valued according to their earnings which means that the owners have the ability to increase income while decreasing costs. Compare this to the stock market, where it’s not always clear what causes a particular stock to be fluctuating up or down during a particular day.
Income Generation
The main purpose of investing, but multifamily can allow you to earn revenue stream from the investment. Many multifamily options offer regular or quarterly payments or checks to investors based on the income stream, or cash of the property. Instead of waiting for years to collect your funds after your property sells, you will earn a little money every quarter or month to save or spend on as your main source of income. Compare this with stocks, in which you need to sell your stock in order to earn any gains, or you can invest with one of the very few companies that offer a small dividend.
Additionally, multifamily properties offer higher cash flow and lower risk than single-family houses. With several residents living in one place, A multifamily home can produce tens of millions of dollars of cash flow every month. A single family home usually produces only a few hundred dollars each month. If the owner is removed from the home and the property is subsequently sold, it will lose funds because you are still required to pay for the mortgage. If a resident is removed of a multifamily home that has 50 units, there’s still 49 tenants who pay rent to cover mortgage as well as other costs and creating cash flow.
Forced Appreciation
In addition to the earnings during the time for the purchase, the multifamily house could also earn a profit upon selling. Like a single-family home, you’ll want to be capable of selling the property for more than the price at which you purchased it. Multifamily properties can achieve this by increasing your earnings and decreasing the costs, and this is known as forced appreciation.
For every additional dollar you earn or every dollar you don’t need spent, raise the value of your home by over one dollar. This is due to the fact that the net operating revenue (which is the sum of the earnings minus expenses and expenses, is a percentage called a cap rate. It is based on the worth of property. In the example above, If there is a cap of percent when the total net revenue is $100,000, the property is worth $100,000/0.10 (or $1,000,000). The cap rate varies in each market and fluctuates according to the market conditions.
How can an investor make more money or reduce expenses? One common method to increase earnings is to improve an apartment that isn’t well maintained and has lower market rents to raise the rent to market rates or the same rates similar homes in the same region are charging. An effective way to cut costs can be to deduct the cost of utilities to residents, in the event that the owner pays for the utility bill. This forced appreciation helps raise the value and lower the chance of a market decline that sees rents on the market stop rising naturally.
Tax Benefits
The whole idea of earning and appreciation is fantastic, however, I’ve heard a lot of people asking “what about taxes?” Investors in stocks or people who have sold a home are aware of capital gains tax, which are a government tax collected from the profits. Multifamily properties can offer a significant tax advantage through depreciation. Depreciation is an element of tax law which allows companies to deduct a percentage of the cost of their capital expenditures like an apartment building each year for the duration that the property.
In the case of multifamily properties, the lifetime of the structure is thought to run 27.5 years. This is not 27 or 28 years instead of 27.5 years. That means that every year, the owner can subtract 1/27.5 or around 3.6 percent of the value of the property from passive income. This can be significant for multifamily homes, and can be more effective by separating the cost. Cost segregation is a way of separating each of the major components of the structure like the HVAC system and wiring, appliances and the structure, and then taking them down in accordance with the lifespan of the particular part. In many cases that are constructed, the lifespan is considerably smaller than 27.5 years, meaning that you could get a bigger deduction during the initial years of ownership.
There is still capital gains tax to be paid. Most often, they are long-term capital gains since the property is in the hands of the seller for longer than 12 months and are assessed at a less percentage than capital gains that are short-term. There are however ways to reduce or delay certain taxes on capital gains. Some of these gains can be protected by depreciation which is left over from the previous year. Through cost segregation, it is typical to be able to deduct more than income, which means on paper it appears like you lost money, even when you earned cash. These additional deductions won’t be able to offset the income from your W-2, however they are there until you earn additional passive income, such as income from the sale of the property, which you can offset the deductions. There is also the option to delay tax payments by through the 1031 exchange. Talk to your tax advisor about the particulars of a 1031 swap if you’re looking for more information, as it is too complex to be covered here.
Stability
Multifamily properties have traditionally had better results in comparison to other assets. In 2008, during the recession, the default rate of multifamily homes was 0.4 percent, while the default rate for single family houses increased to 4percent. A lot of multifamily properties continued to earn cash during the recession, as homeowners lost their homes and were forced to move into cheaper apartment homes.
Multifamily real estate is less volatile than the market for stocks, which can increase one day, and plunge the next. These properties will provide steady and predictable income so that you can rest comfortably at night. Numerous trends of the present suggest a continued growth in multifamily homes. Many young people are opting to rent apartments instead of purchase a home. A few rents because they are able to travel between states and change jobs. Some aren’t able to afford homes due to the rapid rise in the value of homes in recent years, and the burden of student loans.
There are many millennial who are deciding to rent apartment homes. A lot of baby boomers are seeking for homes that offer high-quality amenities, a short walk to shopping and restaurants and a low and affordable price of life. In total, these generations comprise nearly half the population of the US and represent an enormous need for apartment units.
Community Improvement
In the end, it’s just in this to make money. We want to contribute to making the communities that we invest in better. Multifamily investing provides us with the opportunity to upgrade existing properties to create places that residents would like to reside in. It also provides steady jobs for the employees who maintain and manage the properties. There are few other investments that allow you to have a direct impact on the community in this manner.
Summary
The six factors listed above make multifamily homes excellent Real Estate Investment Options, particularly when compared with other investments such as stocks or single-family real estate. While past performance does not guarantee future results however, there are numerous indicators that point to a growing demand for multifamily homes in the near future. Of course, multifamily investing isn’t risk-free, and I would advise you to find out more about it by reading other articles that are on this site and examining the numerous books and podcasts on the topic.
I am not an accountant, attorney, or financial adviser So, please speak to your financial adviser regarding the above details. They’ll be able to help you in your specific situation.
