The television network HGTV’s ratings have steadily grown over the past decade, largely due to the popularity of mega hit shows such as “Fixer Upper” (averaging 4.6 million viewers this year), “Flip or Flop” (2.8 million), and “Brother vs. Brother” (2.6 million). These fix it and flip it focused shows make for great, engaging television, creating the illusion of an easy “get rich quick” scheme. These kinds of shows however completely gloss over the value of investing and creating generational wealth as well as a steady stream of passive income.
Let’s discuss 4 reasons why multi family real estate investing is dominating markets and what you can do to dive in and join the party.
Proper leverage is the fuel to developing substantial wealth. In many cases, you can invest as little as $100,000 in capital and manage over $1,000,000 in assets. Asking your current financial advisor to extend this kind of leverage to you is a sure fire way to hung up on.
Multifamily properties allow you to receive all of the benefits; ample cash flow, appreciation of assets, and of course incredible tax benefits. But why would a lender require only a miniscule down payment to acquire such valuable property? To put it in layman’s terms, the buyer is acquiring a steady revenue stream that will cover the expenses of managing the property and actually develops additional cash flow all at the same time. The banks/lenders feel secure and protected with this form of real estate.
Ultimately: Multifamily real estate lets investors manage a greater number of assets with far less of their own upfront capital.
Multifamily real estate is all about increasing Net Operating Income (NOI). This is achieved by increasing gross income by decreasing the operating expenses. The Net Operating Income is the gross income minus the operating expenses. By investing in multifamily real estate, you can take control and increase the value of the asset by driving the NOI up.
A great way to of gaining access to the equity that you’ve accumulated in a property is to refinance. Refinancing usually allows you to get betters terms with your lender while simultaneously reducing your monthly costs.
We’ve established that multifamily units provide a great source of passive income and increased cash flow, however another very valuable factor to keep in mind are the current investor friendly tax policies set forth by the government.
Depreciation brings with it a massive tax benefit to investors. According to author Gino Barbaro “Depreciation is 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.”
You can also utilize CSS “Cost Segregation Studies”. These CSS allows the owner of a multifamily investment to identify personal property assets that are grouped with real property assets and differentiates the personal assets for tax reporting.
This basically means that you are reclassifying the accelerating depreciation of your assets while writing off a larger portion of your depreciating expenses and realizing your losses quicker.
4. Diversification through Consolidation.
Operating multifamily buildings brings with it an often easily overlooked concept. Simply put, managing one large building, with multiple tenants under one roof, provides greater financial flexibility when compared to managing multiple single family homes that are distributed about.
The financial impact of having a temporary vacancy in one building can easily be offset by the other tenants. You limit your risk by having as many tenants as possible. Conversely, a temporary vacancy in a single family home equates to absolutely no rent for that given month moving the financial burden to your own pocketbook.