WHY SHOULD YOU INVEST IN MULTIFAMILY REAL ESTATE?
There are many ways to build long-term wealth. The two most common investments that people investigate are stocks and single-family real estate. While these are great options, multifamily real estate (apartment complexes) is one of the best and safest investments you can make to grow your wealth. It has been proven to create more millionaires than any other investment strategy. To compare these investments, let’s look at scalability, risk factor, tax benefits, returns, and passive investing, to break down why multifamily real estate is the most effective option.
Scalability, in this case, is the ability to grow from a small investment to generational wealth. There is a common misconception that you must start with single-family homes when investing in real estate. Logically, they seem easier to get started with because they are smaller and more affordable. But syndications allow you to get involved with multifamily right away, without the pressure of investing alone and with investment amounts like that of the down payments on single-family homes. What’s a real estate syndication? Essentially, it is when many investors pool their money to purchase a larger piece of real estate than any of them could on their own. A group of professional investors, known as sponsors, put the deal together and manage the business plan for the property for the life of the investment.
You can contribute a relatively small amount to syndication to start, as you familiarize yourself with the process, and see the results. As your wealth begins to grow, you can contribute more, and get into even bigger deals. Oftentimes, these larger properties are refinanced within the first 3 to 5 years, giving you back much of your invested capital, while you retain ownership and therefore, cash flow. This allows you to invest THAT SAME MONEY, into a second deal to get more cash flow. This allows you to grow your wealth at a very fast rate. For a real-life example of how this works, check out THIS VIDEO.
Multifamily real estate is much easier to scale because the projects themselves are bigger. This makes them more efficient for property managers to operate, saves money on expenses, and generally increases profitability. It is much easier to manage one apartment building, as opposed to 50 single-family houses.
Another reason you can scale faster is that when purchasing real estate, as opposed to stocks, you can use leverage. You leverage your down payment, with funds from a bank. In the case of multifamily, the bank often provides 65%-80% of the money towards the purchase. Despite this, the investors get returns based on the total value of the property and the total increased value of the property over time. This is not a common practice when purchasing stocks except for risky trading done on a margin. Another important part of scalability is the ability to invest passively.
Passive investing is when projects are making money on their own, with little to no effort from the investor. Single-family investing can be passive after sourcing and purchasing a property if you hand it over to someone else to manage, but that generally cuts into the profits substantially. You also must wait a long time for the property to increase in value, so it isn’t going to grow wealth very quickly. Instead, most people in the single-family space eventually resort to “flipping homes” to scale quicker. This is the opposite of passive investing because it functions more like a job, with constant work from the investor.
In contrast, multifamily properties can be forced to appreciate, hence wealth growth can happen faster. This is because all commercial real estate, including multifamily, is valued based on income. No matter how nice you make a single-family house, its value is capped based on the neighborhood's comparable properties. How much rent you collect and how low you keep your expenses, have no effect on the value of the property. Not so with multifamily property. The value is a simple math calculation of net operating income divided by the area capitalization rate. Therefore, if you can increase the income of the property, you can increase the value of the property. A professional sponsor will have a plan for doing this, often involving improvements to the property, reduction of expenses, and better tenant selection.
When you invest in multifamily properties through syndication, the sponsors and property manager handle all the planning, financing, property maintenance, business plan implementation, tenant selection, and eventual property sale for the entire investment group. This makes passive investing in real estate available for everyone, even if real estate is not your main occupation. It simply generates money idly in the background, without taking away your valuable time. This allows you to scale because you can take part in many such endeavors without it taking up any more of your time.
RISK AND RETURN
This is where we see the big difference between multifamily real estate and stocks. Rents have nearly always trended upward and have been skyrocketing over the past three years, with some states seeing over 30% rent growth annually. While stock investing can be passive (unless you are a day trader), it experiences a lot of ups and downs. In general, stocks do not allow for the use of leverage, tend to provide lower returns on average than multifamily real estate, and can be volatile.
When the housing bubble popped in 2008, the delinquency rates on Freddie Mac single-family loans soared, hitting 4% in 2010. By contrast, delinquency on multifamily loans peaked at 0.4%. So, if you’re looking for a more recession-proof way to invest your money, there is no better option than multifamily investing.
The average stock market return over the last 15 years was 7.04% but after fees, inflation, and taxes that return becomes a paltry 2.5%. On the other hand, multifamily syndications routinely return average annual returns of 10% and above. That’s compounded after fees, inflation, and yes, even taxes. Additionally, stocks can be very volatile, while rents for apartments tend to stay very stable. Stock values can go all the way to zero should a company go out of business, but a hard asset like real estate will always retain some level of value.
There are tons of tax benefits that come with real estate. First off, passive income is taxed at a lower rate than active income. Additionally, you can also write off paper losses such as depreciation even when you are making a great deal of profit. This is accelerated even faster-using bonus depreciation. Another strategy is to reinvest profits from the sale of a property into a larger property, using 1031 Like Kind Exchange. This allows you to roll over the taxes you would otherwise have paid on that profit into your next project, and potentially never have to pay them. That’s just the tip of the iceberg when it comes to taxes and real estate, but we will save the rest for another day.
In short, multifamily real estate is the most effective investment you can make because of the scalability, safety, tax benefits, returns, and the ability to invest passively.