Pride of Ownership Multifamily
Here’s why we think Apartment House – Multifamily Properties are key to wealth building.
Income
Properties like these are usually referred to as investment property. Apartment Investments, multifamily properties deals, properly structured with enough down payment, will generate a positive cash flow equivalent to, or perhaps better the interest rate of the mortgage on the property. This cash flow will increase in most markets, even a highly leveraged, negative cash flow property can turn into a positive cash flow investment with the passage of time.
Depreciation
Depreciation is the tax deduction one can use against the income real estate produces. Here’s the layman’s version of how this works. The Government in an effort to encourage investors into the multifamily rental property or residential income property allows the value of the improvement (that’s jargon for the buildings) to be written off or depreciated over 27.5 years. (39 years for commercial) This was a solution to the problem of Government providing housing to the poor or low income citizens. Only the improvements are covered under this law, not the land as that is expected not to decline in value during the hold period.
Equity
Growth Build-up – Most folks grow their equity over a period of years because the historic trend in real estate has been upward. However, they also get equity buildup results from the periodic pay down of the principal amount of the loan, usually through monthly payments on an amortized loan. Even if there is no appreciation over the life of the loan, the property owner would end up with a free and clear property at the end of the loan payment period on a fully amortized loan. This is usually a 30 year period on residential property but it is exceedingly rare to find such financing.
Appreciation
While the amount of appreciation varies from market to market, real estate is a growth asset and often the largest part of the return on an investment in real estate is the equity gained through appreciation. Even small amounts of appreciation year after year can be considerable. Usually, the longer you hold on to a property, the better. The effect of appreciation is greatly magnified by the use of leverage. Since the late 1970′s real estate has been a tremendous inflation hedge. Some would claim that is away better than hoarding gold or other precious metals.
Leverage
Through the use of a mortgage or borrowed money along with a small (but increasing recently) amount of money of your own, you can control a real property. The best leverage most of us can obtain in the stock market is 50%. In real estate, it is not unusual to obtain 65%, 70%, and even 75% leverage. If we take the latter, you can control a dollars worth of property for a quarter. With leverage usually comes the risk of lower cash flow after operations costs, but also with that risk comes potential for greater investment return.
Bonus
In addition to the I.D.E.A.L. as stated above, multifamily real estate investments have potential additional tax benefits including the aforementioned IRC 1031 Tax Deferred Exchange and cost segregated treatment by your CPA. There’s always a way to use real estate as a bank or reserve for a college fund for kids or grand kids, additional source of down payments for expanding your holdings or just plain borrowing against. Remember if real estate is part of your retirement savings, there’s no rule against borrowing from it or taking a withdrawal in the form of a loan anytime either. Bonus! No immediate taxes due! But check with your CPA for your particular case.
Leave a comment or ask a question below.
