Multifamily Real Estate Investments: Easy Guide to New Investors

With the pandemic we have recently experienced, many new investors feel uncertain about what asset class is the best way to explore cash flow and boost the net operating income (NOI). It prompts them to seek a stable investment that continuously appreciates its value and generates high returns. 

There are several different categories of assets to invest in, including stocks, and mutual funds, single-family homes, and multifamily properties. 

So, if you’re thinking of trying residential multifamily real estate investing, you have not mistaken. You are here because you might have heard about multifamily real estate investments’ proven stability and historical performance.

Multifamily investing has been cost-effective for most real estate investors for years. It has been an integral part of high-net-worth portfolios. It is the kind of asset that creates millionaires out of ordinary people. 

Multifamily investing is an effective wealth-building tool and a great way to diversify your real estate investment portfolio. But before we delve into the REASONS why this specific residential real estate is an excellent investment, let’s define the multifamily property.

What is Multifamily Property?

A multifamily property has five or more units under one roof. It includes residential buildings such as duplexes, condominiums, apartment complexes, and townhouses. The multiple-unit residential property has its living room, bathroom, and kitchen. It is a physical structure where several families live.  

A multifamily property generally consists of a piece of real estate and the land it sits on, held under one recorded deed. In some cases, one or more parties can own the property.

Why Investing Multifamily Real Estate?

Concerning passive income retirement investing, multifamily properties offer many opportunities. Here are the ten reasons why investing in multifamily is a wise investment:

1. It creates an increased cash flow.

Renting out a single-family property produces one stream of monthly income. It generates enough income to pay for operations, capital improvements, and financing. The rest goes to investors as returns. 

On the other hand, renting out rental units in a multifamily building creates multiple income streams. 

Vacancy rates affect cash flow. If you own a single apartment with no tenant, it is 100% vacant and has no income. If you own equity in a 100-unit apartment complex, five vacant apartments will still yield cash flow through a 95% occupancy.

2. It has lower risks and higher returns.

Weighing risk and return is essential because high returns are attractive, but we also must consider how much trouble we want to take. But worry less. 

Multifamily real estate is one of the most recession-resistant types of property and is better able to weather economic downturns than any other property class. 

Multifamily properties can be more resilient in a down market because they’re more diverse than single-family homes. For example, if a family moves out of their single-family home and goes into a multifamily building, they’re likely to make new friends there who will help them through their transition. 

It makes the apartment building safer for families during tough times, which helps keep its value relatively high. In addition to being more diverse, multifamily buildings have lower vacancy rates than single-family homes. 

It means that if one tenant moves out of an apartment in an apartment complex or condo building, other people living in different units can fill that vacancy immediately without waiting for repairs or renovations. 

Multifamily real estate is an alternative to stocks and bonds, with a double-digit annual return (15%+) and the potential for double-digit growth in a short period. The appeal of the multifamily sector lies in its ability to generate high-yield returns through low vacancy rates, quantifiable appreciation metrics, scalability, and economies of scale. 

By raising the rent on a 200-unit property by $25 per unit, you can increase its value by $1.2 million (at a 5% cap rate). As such, operators are often required to wait at least one or two years before raising rents so they can complete renovations on their properties. 

Also, apartment buildings have a lower risk of foreclosure than single-family rentals, and lending institutions can offer more competitive interest rates on apartment loans. Much less likely to depreciate, multifamily property investment is a wise choice for investors looking to protect their money.

3. It has a strong market.

According to the National Multi-Housing Council, the United States is now a renter nation. With more and more Americans renting their residences, we have two new generations of renters hitting our market- Generation X (ages 30-44) and the        under-30 crowd. 

Having a sizeable amount of renters makes a great multifamily market. These people are a ready market for apartment owners. 

The experts’ forecast indicates that apartment owners are definitely in the right business with currently stability and more growth on the horizon.

The multifamily market is experiencing a boom due to vital economic factors, including the high cost of buying a home, an increasing preference for renting among millennials and baby boomers, job growth, and income growth in the US. 

The U.S. Real Estate Market Outlook indicates that Atlanta, Dallas, Denver, and Philadelphia offer more modest income and appreciation returns than gateway markets. They also forecasted multifamily occupancy levels to remain over 95% with approximately 7% growth in effective net rents in 2022. 

Migration from core markets to secondary and tertiary markets and from the cities to the suburbs will continue, causing rental prices in these areas to remain high throughout 2022. 

However, cap rates might also remain the same; expect vacancy rates to remain low and rents to grow. Despite the recent trend of real estate property prices rising, the high demand for residential properties is increasing. 

Thanks to Fannie Mae, also known as the Federal National Mortgage Association (FNMA), provides relief for millions of Americans, especially during this trying time of the pandemic. With a solid and right market, investing in multifamily units in these areas could be an intelligent move for prospective investors.

4. There are several tax advantages.

Accelerated depreciation on buildings and assets potentially offset all income taxes from the property cash flow, or the rental income investors collect from tenants. 

Also, the government offers tax incentives to investors and homeowners to encourage them to own real estate. Earned income cannot produce wealth. It includes net earnings from self-employment, lotter, income on capital gains like stocks, etc. 

When you are on a lower income, the Internal Revenue Service (IRS) tax payments do not seem significant, but the higher your income gets, the most considerable single expense of the year might just be your taxes. Did you know an average American must devote one out of three months’ salary to yearly taxes. 

Pay yourself first by investing your earned income in real estate and potentially driving your tax bill down to $1, as the ultra-wealthy do.

Investments in multifamily are tax-efficient, which provides two significant tax benefits for individual investors. 

1.) The apartment complex is purchased in a limited liability corporation, structured like a corporation. The LLC runs through all property income and expenses; anything left is “distributed” to individual investors. It is taxed like a partnership. This structure could reduce personal tax liability. 

2.) Individual investors could defer capital gains taxes on a profitable investment by utilizing a specialized transaction called a 1031 exchange. They can be repeated repeatedly, allowing tax-free capital growth while deferring taxes indefinitely. 

How to get tax benefits?

Depreciation –  The 3.6% deduction allows real estate investors to write off the value of their buildings each year, even though there is no out-of-pocket cost for this deduction.

Cost Segregation –  Accelerated Depreciation is a process that allows businesses to depreciate the majority of the cost of an asset over five years. It is beneficial because it doubles or triples depreciation during the first five years of ownership. This can help your company determine whether an asset has been fully depreciated at the end of its useful life.

Bonus Depreciation –  One of the most significant benefits of commercial real estate is accelerated depreciation. It allows investors to deduct 100% of their investment in the property from their income taxes in the first year after purchase.

1031 Exchange – When you sell real estate for a profit, you can do a 1031 exchange allowing you to defer taxes instead of paying capital gains taxes on the gain.

5. There is a forced appreciation of the property.

Multifamily is an investment strategy that relies on the forced appreciation of a property through improvements and upgrades. If you increase the rent by adding value, it increases the property’s value significantly. The net operating income (NOI) is the basis of multifamily deals.

6. It is an excellent hedge against inflation.

Multifamily property investing is a good way of protecting your wealth.  It thrives and has a robust market with stable returns and an attractive hedge against inflation. It is an excellent hedge against inflation because it provides a stream of income against which mitigates the effects of the price increase.

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7. It is ideal for property management. 

Professional asset managers oversee the property’s operations, tracking the sales, occupancy, cost, and profit metrics.  Multifamily property generates enough income to hire a property manager, making it a good option for those who don’t want to handle day-to-day operations or repair issues. 

Property managers typically receive a percentage of the monthly income generated by the property they manage. They perform duties like screening tenants, collecting rent, evicting non-paying tenants, and maintaining the property. Hiring an external property manager is not financially viable for many single-family homeowners due to their small investment portfolio. 

Multi-family properties produce enough income for owners to afford property management services without hitting their bottom line. 

8. It is a passive investment.

Passive investing is a long-term wealth-building strategy that believes the stock market will rise over time. Passive systems are generally less expensive and less complex than active strategies. They often provide better returns over the long term. 

Most U.S. investors surveyed in a Gallup poll said passive investing was the best strategy for long-term investors who want the highest returns. Only 11% of those surveyed said “timing the market” was more important to earning high returns.

Recommended Video: Being Successful in Multifamily Real Estate by Investing in Others and in Yourself

 9. It can produce generational wealth.

Robert Kiyosaki once said, “It’s not how much money you make; it’s how much money you keep, how hard it works for you, and how many generations you keep it for.”

If you think of your future children and grandchildren, find a great way to create wealth for generations to come. Generational wealth transfers money and other assets from one generation to the next. The age earning wealth, such as your parents, is working hard and making a good salary while they are at it. 

However, they cannot just stop working one day and expect to grow wealthy because their income will cease to exist. The solution is to invest their money so that the funds can flow even when they are not actively working to earn it.

Multifamily syndication can produce this kind of wealth. While it is possible to become rich quickly, it isn’t easy. Even those who have managed to make a lot of money in a short period lacked the monetary discipline needed to reinvest and manage their money lost up losing it. 

You can’t build generational wealth by investing just a few hundred thousand dollars in multifamily properties. It takes discipline and patience, and you must be willing to reinvest your money and let it grow over time. 

Multigenerational wealth comes from a combination of hard work and luck. Investing in multifamily properties with a partner can help you build wealth that can sustain generations–but it takes patience and discipline. 

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10. It is a winning business that benefits all involved.

Multifamily apartment complexes are tangible, physical investments; actual buildings with real people paying rent. You can drive past it, speak with the property manager, and know that it will cash flow if you have invested in a property where the numbers make sense.

Improvements in the property = Improved living conditions for communities

Multifamily investments boost economic growth by providing affordable housing for the residents in the community. We identify properties where we see significant room for improvements that enhance the tenant’s living experience. We regulate the expenses by introducing energy and water management systems that create a more sustainable environment. 

Increase in value of the property = Above average return on investment for investors

Higher incomes and regulated expenses lead to higher net operating income (NOIs) and returns.

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Downsides of Multifamily

Multifamily investments offer excellent returns and growth, but they also have downsides. When you invest in real estate, cash flows and asset appreciation depend on executing the business plan to realize the projected returns. Real estate is illiquid, meaning that you may not be able to get your money out when you need it. You have to rely on the general partner to make sure that your investment is money well spent.

Conclusion

Despite the few downsides of multifamily real estate, it has more advantages. You get bigger and lifelong cash flow. It has lower risks but higher returns. It can grow your real estate portfolio, hire a property manager, and produce generations of wealth. 

There are many good things about multifamily, and as prospective investor, you should know how to balance risks and rewards. Multifamily real estate is a great investment opportunity for savvy investors like you, who take advantage of its low-risk and high-reward potential.  

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You can make intelligent investment decisions if you are well-guided by experienced individuals to help you get that cash flow.  To buy a multifamily property, start by finding an operator with experience with multifamily homes who can help you make intelligent investment decisions. Many firms provide syndication services to help you create your real estate investment. Let us help you. 

Wellthy Capital helps new investors like you to start your real estate investment portfolio. We are excited to extend our investment opportunities to more people and impact their lives. 

Our team of experts, including ourselves, carefully vet our deals, and we invest our money alongside our investors to underline our conviction in the values we are funding.

Related: Real Estate Closing: A Free Guide for Syndicators   

From a multifamily property real estate investment standpoint, location is paramount to considering when and how it makes the most sense to invest in a multifamily home. 

We are critical in finding the right place for our investments.  We scouted out locations ideally suited for the long-term investment we were after. We looked for neighborhoods with good school districts, areas in up-and-coming parts of town, and places conveniently located near popular destinations. 

We’ll do all the work so you can focus on the things you value the most. You are welcome to visit our website, follow our podcast channels on Apple, Stitcher, and Spotify, and don’t miss to get a free copy of our e-book The Path to Wellth. Don’t hesitate to reach out for an introductory call, and we’ll answer all your questions, provide data to support our claims, and get you on the path to investing success.