When investing in real estate you probably want to know how you are going to make money. Or at least you should be interested in those details.Today let's look at some of the ways MultiFamily makes you, the investor, money.
Cashflow or Cash Returns. Cashflow, or regular income received in the way of cash, is the money you receive on a regular basis from your multifamily investment. This usually happens on a monthly or quarterly basis. Cashflow is the piece that puts cash in your pocket on a regular basis. You don't have to wait for the sale or refinance of the deal to realize cash flow. Cashflow is generally calculated like this:
Gross Income - operating expenses - capital reserves - mortgage payments = Cash Flow
- Gross income is made up of rents, amenities, storage and other items that bring in income
- Operating expenses are repairs, property management, marketing, turnover, taxes, insurance, landscaping, etc
- Capital reserves are monies set aside for capital expenditures and "rainy day" events
- Mortgage payments are principal and interest
Cash flow can very by property and location as well as how long the property has been owned. But it usually starts in the 5-8% range and then increases to 12-15%. Sometimes as much as 20%
Appreciation. This the gradual increase in value of the property. It's the most exciting part of the investment, in our minds! Why? Because appreciation is where true wealth is made and some of the factors impacting appreciation are completely within our control.
We break appreciation down into two catagories.
- Forced appreciation. This is the one we love. Why? Because we can control it and put business plans in place to directly impact this type of appreciation. The management team can build actions into their business plans to reduce operating expenses and increase income which directly impacts the property's value.
- Market appreciation. This is the result of increases in things we have little to no control over. Market appreciation is impacted by increases in population, jobs, and apartment demand. While we can't control those things we can purchase "smart" when it comes to market. By building criteria into our buying analysis we can target markets which have strong indicators that show favorable factors impacting market appreciation.
Principal Paydown. You ever hear the phrase "use other people's money to build your wealth"? Paying down the principal is one of the ways we make this happen. While you are taking home cash flow on a regular basis, as a result of your rentals, you renters are also paying off the loan you took out to purchase the property. Not only are the renters giving you monthly cash flow but their rent also pays off your mortgage and reduce the outstanding loan balance! Your renters contribute to an increase in your equity which, alone, can bring up to a 4% annual return.
Tax Benefits. This is the one many people never consider. Even as a passive investor you get to realize the tax benefits that come with owning multifamily properties. At a very high level the two main areas for benefits come from:
- Depreciation which allows a multifamily owner/investor to depreciate the property's building(s) value over a 27.5 year time span. Remember that cash flow? In many cases this depreciation deduction will allow the owner/investor to deduct most, if not all, of the cashflow, from their income.
- Accelerated depreciation can be taken on certain, CapEx items. Things like cabinets, appliances, lights, some mechanicals.
Additionally if you are a passive investor and not an active member in the Real Estate investment then you will receive passive income tax treatment. Which means your real estate income is taxed at passive income tax rates and not subject to employment taxes while any appreciation is taxed at capital gains rates rather than normal income rates.
As you can see, investing, especially passive investing, in multifamily real estate offers you a number of way to make money, build wealth and reduce the amount you pay in taxes. While the cash flow is awesome the other benefits are equally as impressive!