â€œInvesting should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.â€
Welcome back to another edition of the Rookie Real Estate Blog! In the last post, I talked about 5 benefits of investing in multifamily assets. To recap, here they are: 1. Using Other Peopleâ€™s Money, 2. Partnering with Experienced Operators, 3. Superior Lending Options, 4. Economy of Scale and 5. Varied Ways to Make Money. If you werenâ€™t already riding the high thinking about the benefits of multifamily investingâ€“buckle up buttercup! We are about to catch a ride on the Express train straight to Mind Blown Station!
Unique Tax-Deferred Benefits
The tax benefits afforded to commercial real estate (CRE), and real estate in general, are truly unique. It is like the government is encouraging real estate investors to purchase and improve real estate across the country through tax incentivesâ€¦which is exactly what they are doing! Investment real estate properties (outside of a primary residence) benefit from a tax break known as depreciation. Depreciation is a income tax deduction of costs associated with purchasing and maintaining a property over a set amount of years; 27.5 years for residential property and 39 years for non-residential property. Although this is not money back in your pocket, it IS money you donâ€™t have to pay taxes on; potentially saving you thousands or hundreds of thousands of dollars in tax savings (for now).
For example, your MF asset provides $100,000 in annual cashflow and depreciates $400,000 for the year. That $400,000 can be used to offset your taxable income or those of your investors, meaning less taxes due come tax time. This depreciation can be accelerated by use of a Cost Segregation Analysis and Bonus Depreciation, allowing a huge portion of the depreciation to be applied within the first year of the hold. There is a reason the vast majority of millionaires are made through real estate and depreciation is one of the biggest.
Invest with Retirement Funds
It may not surprise you to know that there is more than $4 trillion sitting in retirement accounts across the country: in 401k, traditional IRAs, Roth IRAs and more! It also may not surprise you to know that the overwhelmingÂ bulk of retirement funds are invested in the Stock Market (mutual funds, index funds, stocks, options, etc). I think this is largely in part due to ignorance of the American people of other options available to them. No, the Stock Market is not the only way to invest your retirement accounts. Yes, you can use your retirement funds to invest in Real estate!Â How do you do this? Through the use of Self-Directed IRAs (SDIRAs), Qualified Retirement Plans (QRPs) and other such financial instruments. SDIRAs are just thatâ€“you can self-direct exactly HOW to invest your money through the use of a SDIRA custodian. I will go into more detail on SDIRAs and the huge benefits at a later time, because it is a topic that deserves its own post.
Forced appreciation is a crucial factor unique to commercial real estate (CRE). If you have bought a house before, you know how volatile home prices can be. Your homeâ€™s value is directly tied toÂ market comparables in the area with very little you can do to impact the value. If a house similar to yours sells for $100,000, youâ€™d be hard pressed to argue $200,000 purchase price regardless of what you have done to improve your property. With CRE, the value of an asset is directly tied to the INCOME IT PRODUCES and the same is true for multifamily assets. I can increase the income of the property by two prime means: raise rents or lower expenses. In other words, I can purchase a multifamily property, raise rents by $200 per unit with minor renovations and directly increase the appraised value of the asset. This physical work directly translates into higher cashflow for you and your investors! In contrast, the only way I can meaningfully affect a stock price is to purchase a HUGE amount of that stock, putting more money into the hands of brokerages and banks.
Manyl homeowners were drastically affected by the last recession in the 2007-2008 time period. Mortgage default rates for single family homes hit 4% with land development and construction loans defaulting at a record 15%! Multifamily assets, on the other hand, stabilized at around .4% default rate through the whole recession. If you think about it, this makes sense. If homeowners can no longer afford their home, the only options are to rent or go homeless. Recessions and times of financial turmoil are actually beneficial to the multifamily investor because it solidifies your tenant base and drives down vacancy rates.
If you have ever attempted to flip a single family home, you know how many â€œflippersâ€ are out there trying to make a quick buck. The competition is fierce and nasty, forcing many to resort to dubious means to source and finance deals. A number of these same individuals think that investing in multifamily or apartment buildings is outside their means, expertise or experience. They discount apartments as a pipe-dream for the future and as such the competition is relatively low. Use this to your advantage! Get in while the getting is good!
So there you have it! Ten total reasons why investing in multifamily properties will make you healthy. wealthy,Â and wise. Commercial real estate is not for everyone however and those that are bold and brave will reap the rewards of their labors. How to do this? Do the hard things that others are unwilling to do. See the opportunities that abound in a distressed property. Dig into the sellerâ€™s motivation and solve their problem. Connect with your property manager, broker, real estate attorney and other real estate professionals on a real basis. Learn, network and take action!Next post will we get back to the next edition of Whatâ€™s Up with Carver, focusing on the numerous tenant, equipment and criminal issues over the past few months.Â Donâ€™t forget to Like us onÂ FacebookÂ and Follow us onÂ InstagramÂ too!