Consumers nowadays have the option to invest their hard earned money in countless investments, ranging from crypto, to real estate, to stocks and bonds and commodities, and what may seem like a great investment to the novice investor, may in fact be a speculative selection. How do you choose which is the best vehicle for your money?
What I am going to discuss in this article is what characterizes a quality investment, and how multi family real estate passes the test with flying colors.
The three characteristics that every investor should be focused on are:
Now obviously, there are numerous characteristics, but these three traits are, in my opinion, what sets apart a superior investment from a mediocre one. Let’s dive into the three traits and how multifamily possesses them all.
Leverage is the rocket fuel to creating massive wealth. There are very few investments where you can invest as little as $150,000 in capital and control a $1,000,000 asset. Try asking your financial advisor to extend you this type of leverage. I guarantee the next thing you’ll hear is a click on the other end and your phone line going dead.
You receive all of the benefits, even though you may have only 10-20% of capital invested for the entire investment:
- Tax benefits
- Economies of scale
- Principal pay down.
Why would a lender require a small down payment to acquire real estate? Simply put, the buyer is acquiring a revenue stream that covers the expenses of the property and throws off excess cash flow. The bank feels safe and protected with real estate. Real estate is one of the very few assets that enjoys this massive opportunity.
This is an added bonus with the current economic climate that we are entering. The government is printing money like drunken sailors, and this increase in the money supply is referred to as inflation. Inflation ultimately leads to an increase in prices, and an erosion of the value of the dollar. Inflation allows borrowers to pay lenders back with money that is worth less than it was when it was originally borrowed, which benefits borrowers tremendously.
Bottom line: Multifamily real estate allows the investor to control more assets with less of his or her own capital, which will lead to an explosion of wealth when those assets appreciate.
Just be careful! Leverage also works in the other direction as well. If you lose money with an investment, those losses will be amplified with leverage.
Initially, real estate falters on the second criteria. But, as you will see, if you have the patience, real estate offers a unique way to access liquidity from your investment. So how do we tap into the equity of our property? The strategy is called cash-out refinancing, and it is one of the main reasons why we have been able to scale our portfolio quickly and with little to no capital of our own.
A cash-out refinance is when the bank pays off your old mortgage and issues you a new one, based on the current value of the property. We have been able to refinance over $11,000,000 from our portfolio, and “roll” the proceeds into the next investment. We call it our Refi & Roll strategy.
Another huge benefit is that the loan proceeds are not taxable. You are taking out a new loan with a larger balance and you must pay it back (with interest) over time. So there’s no income tax to worry about when you refinance the property. As my old man used to say,
It’s not what you make. It’s what your keep.
It may take a bit of time to access your liquidity, but the tax benefits make it worth the wait! Once you cash out your initial investment, you are in effect playing with house money. You have no more if your own money left in the deal. In addition, we have been able to cash out more than our initial investment on all of our cash-out refis. And the best part is that we still control a cash flowing asset that will continue to pay us.
At Jake & Gino, our motto is that we create multifamily entrepreneurs. And what do most entrepreneurs crave? Control! Multifamily gives the investor control in so many different facets, such as:
- Increasing rents
- Decreasing expenses
- Creating and executing the business plan. (Try walking in on the board of Apple and asking them if you can take over their operations. You are at the whim of management when you invest in publicly traded companies).
You are the decision maker, and have control over the performance of your asset. Multifamily real estate offers the owner an economy of scale that crushes investing in single-family homes. We love the fact that we have larger buildings with more tenants under one roof, versus having multiple single family homes scattered about, which increases the management and expense burden.
If we have a vacancy in one of our complexes, chances are that the rest of the tenants can pay the mortgage. We are limiting our down side risk by having more tenants. A vacancy in a single-family home equals no rent that month, and guess who’s on the hook for the payment?
You can run your apartment complex like a business and scale up operations by hiring full time employees. My true success came when I stopped unclogging toilets and hiring full time maintenance to handle day-to-day operations. I was able to focus on managing the asset and buying more property.
Another amazing benefit that can’t be overlooked is the tremendous tax benefits. The government, in their infinite wisdom, realized there was no way they could provide adequate affordable housing. The solution was to provide huge incentives to real estate owners to step in and get the job done. Depreciation is an enormous tax benefit to real estate investing, especially when it is coupled with a cost segregation study.
Depreciation is basically a non-cash expense that allows owners to take a deduction on the income collected, thus lowering your tax obligation. I love the idea that my asset is appreciating while I get to depreciate it for tax purposes.
The government also allows owners to employ cost segregation studies, whereby the owner identifies personal property assets that are grouped with real property assets, and separates out personal assets for tax reporting purposes.
What does this mean? You are accelerating depreciation on many items from 27.5 or 39 years and reclassifying them to a shorter time period, as short as five, seven or fifteen years. You are writing off a larger portion of your depreciation expense and realizing more losses quicker.
Listen to Rich Dad’s advisor Tom Wheelwright discuss the enormous tax benefits associated with investing in real estate.
Let me recap why multifamily is a superior investment when compared to other asset classes:
In addition, these traits add to the attraction of real estate:
- Economies of scale
- Amazing tax benefits
At Jake & Gino we say there are three basic human needs:
Not only is multifamily an amazing investment, it is also a basic human need. We still haven’t found a way to buy it on the Internet, like you can buy an appliance on the Internet. People need a place to live, and demographics are showing that renting is becoming a much more attractive solution for millennials and baby boomers.
I would love to hear what metrics you look for in an investment. Please leave me a comment down below.