Many hear the term “Multifamily investing” tossed around and hardly know what exactly it all entails. If you are one of those people, don’t worry, you’re not alone.
Multifamily investments are an essential part of diversifying your investment portfolio, and they can yield very high rates of return in exchange for their risks. Unfortunately, investing in commercial real estate can be daunting and complicated, especially if you’re new to the process. But it doesn’t have to be that way!
This short guide on multifamily investments will walk you through everything you need to know about them, from how they work, to evaluating your potential deals, and making it easier than ever to get started on your path to building wealth through real estate.
Compare The Two Options (Real Estate Vs. Stocks)
There are many investment vehicles available to investors. Traditional investments such as 401k’s or 529 are many first investments for those looking to invest in their personal
future or the future of their family. Many will also turn to individual stock picks to build a portfolio of investments for either short term or long term gains.
Real estate and stocks are both asset classes that can be used as long-term investments. Both can act as a hedge against inflation, but each has distinct advantages and disadvantages. Therefore, a comparison of real estate and stocks is necessary when trying to figure out which one is right for you.
Here are some key differences to keep in mind when considering the two:
Time horizon. Those who are looking for a long-term investment that they won’t need quick access to might find that real estate suits their needs best because it usually has a longer time horizon than stocks do.
Opportunity cost. People who want an investment with less of an opportunity cost might prefer real estate since it comes with income potential attached.Usethe example of passive investing not being time intensive but a high reward potentially**
Fluctuations in value. Real estate investments are more tangible, meaning it’s easier for a person to put a face or name to a property than it is for stocks. While stocks are also considered a long-term investment, the value of stocks can be influenced by many factors outside of the company itself such as current economic trends and political news.
Consider Tax Incentives
Buying a stock low and selling high is the ultimate goal for stock investors. However, when selling stocks at a profit, you are often subjected to taxes such known as capital gains. These taxes can erode the gains you may have made and can contribute to a large tax invoice at the close of the fiscal year.
The tax laws that apply to commercial real estate investing are complex and ever-changing. You should always work with a tax advisor when buying real estate, investing in real estate passively, and especially if you plan on doing so in more than one state. Each state has different rules and taxes for investing, but benefits are also available that can make it worthwhile.
For example, you may be able to write off depreciation or accelerated depreciation on specific building components. You can read more about Section 179 of the IRS Code and how it applies here.
There is a cap on investment costs eligible for 179 deductions ($2 million), but you may still consider writing off depreciation when buying property over $2 million.
Make sure you understand some of the big rules before investing!
Advantages Of A Real Estate Portfolio
Real estate offers one of the few ways for individual investors to build wealth, as inflation-adjusted returns have been significantly higher than other investment classes. A substantial majority of millionaires in America are first-generation wealthy – they became rich by building and investing in assets.
Just like any other type of investment, real estate is a vehicle that can help provide security and independence later in life or even pass on wealth to future generations.
Investing in real estate offers an opportunity for high growth over time through appreciation and income. Multifamily properties generate monthly or quarterly cash flow that can be used for living expenses, retirement, or for philanthropic causes that you hold dear.
Here are some other key benefits to consider before investing in real estate:
It’s grown increasingly flexible. Not only can you purchase property outright, you can also invest in real estate by buying shares of a REIT (Real Estate Investment Trust) or a real estate fund that owns properties in multiple cities or regions.
It offers liquidity. You can always sell something as simple as an in-demand rental house or apartment building if need be, quickly converting it into cash.
The benefit of ‘house hacking’. An advantage that’s unique to multifamily properties is the ability to create income through rental units while simultaneously owning your own home. The strategy here is called “house hacking,” which involves buying a multifamily property and living in one unit while renting out all or most of the others.
The Math Behind Investing In Real Estate
Whether you are investing in real estate or a stock investment vehicle, it is important to understand the pro’s and con’s of the investment. No investment should be taken without careful consideration of the risk you are willing to assume with the correct total gain you are hoping to achieve. Stock investments are subject to high volatility and can be easily affected by external factors such as inflation, industry regulations, or supply chain breakdowns.
Real estate investments are typically less volatile than stock investments as they have a better opportunity to remain stable and often do better in adverse market conditions. For example, a rise in inflation may encourage tenants to stay in their current living space due to high interest rates and a lack of affordable homes in their market.
If you’re looking at putting some money into real estate, an excellent place to start is by building out a spreadsheet showing how much of an investment it will take. Try plugging in numbers and seeing how quickly your down payment adds up.
You might find that you can either save more before buying a property or have less space between yourself and homeownership than you expected. Investing in real estate is exciting—but it’s also very challenging.
Make sure to ask yourself important questions as you get down to business with the calculating side, like:
Can I afford it?
What are the tax implications?
What are the legal ramifications?
What is my overall investment strategy?
Make sure you consider all of those challenges so that they don’t surprise (and disappoint) later on down the line!
Multifamily investing is a great way to gain exposure to real estate without too much risk. If you’re looking for an investment vehicle that will increase cash flow and not require a lot of your time, multifamily properties are a fantastic choice for passively investing.
More so than any other asset class, multifamily is exposed to consumer demand and economic growth – two factors that make for a healthy return on investment.
No matter how interest rates fluctuate, as long as people need housing, there will be demand for multifamily properties. Given their relatively low-risk profile (compared with most other forms of real estate), they can also act as part of an investor’s portfolio diversification strategy, reducing risk even further while potentially providing higher returns over time.
Whether you are a seasoned investor or are just beginning to diversify your income streams, multifamily investments are an excellent investment. By reducing the risk of tax external market conditions and tax liabilities, it may pay off greater than a traditional stock portfolio.
Falcon Capital LLC is a private equity firm based in Washington, DC that offers investors the opportunity to achieve financial freedom through dependable passive income from commercial real-estate investments.