The main reason people invest is to provide for themselves and their family in the future when it is time to retire from a long and distinguished career. When the future arrives, hopefully we have enough capital accrued that we are secure financially for as long as we need. However, life can get in the way. We don’t invest enough, or we get too busy to make investing a priority and put it on autopilot in a CD, money market fund, or an IRA vehicle. Then when we get close to that retirement date, we begin to wonder if we are going to outlive our money. We realize that medical care continues to get more expensive every year. We may even see that the stock market did not deliver the expected returns projected many years ago.
The richest people in the US invest in Real Estate. Many of them made their fortunes in Real Estate. With that thought in mind, let us review the Top 9 reasons how investing in Apartments (Multi-Family property) can assist you in achieving the Lifestyle you desire, help you create generational wealth and provide for your favorite charity.
#1 Cash Flow – Cash Checks!
Multifamily properties generate enough income, every month, to cover the cost of operations (e.g.management, utilities and maintenance), capital improvements (e.g. replacing equipment), and financing (mortgage). The rest goes into the investors’ pockets.
#2 Turbo-Charged Appreciation
Multifamily values are based on the net income they produce. Increasing the profit the property nets each year significantly increases the value of the property. This is the best vehicle in multifamily to achieve significant growth in your investment. Even with mostly stabilized properties, optimizing management can yield big returns while enjoying cash flow from day one. Let us look at an example 200 unit property. In a 200 unit complex with an 8% Cap Rate, the management successfully raises monthly rents by $25 per unit. The value of the property will go up by $750K. How does this happen?
200 units x $25 x 12 months/8% Cap Rate
What we get is $60,000 in increased rents (cash) per year, but when divided by the approximate value (Cap Rate) of 8%, the property value increases by $750,000. The same applies when expenses are also reduced through effective management. WOW! You can’t do that in single-family homes.
The more distressed a property, the deeper the discount on the value at purchase, but also the greater the risk and possible significant return.
#3 Higher Returns
The combination of Cash Flow and Appreciation can provide returns ranging from 2x to 10x of the yields of today’s savings instruments. With the average Money Market, CD and Savings Accounts earning less than 2% annually, it is easy to see the value of investing in Apartments. While the exact return will depend on the property, double-digit annualized returns are common.
#4 Diversification and Stability
Apartments provide the Investor a more stable means to achieve their investment goals when compared to the stock market and other kinds of real estate. Apartment values are derived from the Net Operating Income (NOI) it generates, not speculation. Most people believe they are being prudent investing in the stock market and that investing in a stock fund is sufficient to diversify their portfolio. A real diversified portfolio should contain real estate that generates income. Adjusted for inflation, from 1/1/2000 through 12/31/2017, which includes the Great Recession of 2008, an Investor in the stock market earned 75 cents for every $1 invested. Most of that gain was in 2017 alone. However, their average return was only 4.74% and their Compounded Annual Growth Return (CAGR) was 3.15%. This is over 18 years. Will 4% annually achieve your investment goals or requirements.
#5 Inflation Protection
One of the best mechanisms to avoid the impacts of inflation is to own real assets. The value of these assets will increase with inflation, thus being protected by the impacts of inflation. Real cash, on the other hand, will decrease in value from inflation, as each dollar will be able to purchase less in the future than it can today. Additionally, periods of inflation also put upward pressure on wages, allowing for continued rent increases. At a time when the Fed is printing billions of dollars out of thin air, owning multifamily properties is a great inflation hedge.
#6 Tax Benefits
Apartment properties are able to take advantage of depreciation on the building and equipment to help offset income. This essentially offsets some or all your income taxes from the property cash flow. Depending on your personal tax situation, this benefit will further increase the yield on your investment.
#7 Professional Management and Metrics
Asset management and property management teams oversee the property for Private Equity Investors, using sales, cost and profit metrics, making Apartments a truly ‘passive’ income investment, with professionals handling operations. A vast majority of single-family investments require more involvement and focus from the Investor.
#8 Power of Leverage
Private Equity Investors provide capital for the down payment on the property (typically between 20% – 30% of the purchase price), while the acquisition/asset management company uses that deposit as leverage to get a loan to complete the purchase. These loans are also typically non-recourse, meaning that the person signing for the bank loan does not personally guarantee the loan. The risk is born by the property and its NOI. The Investor realizes all the advantages provided in this article using the power of leverage.
#9 Economies of Scale
Multi-Family complexes have huge economies of scale on their side.
- Vacancies impact cash flow less due to large number of units
- Marketing and logistics are more efficient
- Repair and maintenance is more cost-effective, 200 units on 1 property is easier to manage than 200 different houses
- Dedicated employees are easier to manage than contractors
- Upgrades can be carried out with less impact on revenue
Maybe the best advantage of all is the peace of mind of knowing about your future. Knowing that your portfolio is less subject to wild swings in value and that your invested capital is actually linked to real, tangible brick and mortar assets that provide income. Investing in Apartments can provide you these benefits if you are willing.