Many investors proclaim that real estate is an I.D.E.A.L investment. Each letter in the acronym describes an attribute that makes real estate a great investment. Let’s break down what that means.
I – Income
Real estate, particularly multi-family or apartments, can provide a consistent stream of predictable passive income. Our top investment criteria is cash flow, which means that the rents collected each month from residents cover all expenses including property management and provide investors with a healthy, regular return.
Another “I” here could also be Interest Deduction. The interest paid on your mortgage is deductible for tax purposes which helps to reduce your taxable income from your investment!
D- Depreciation
Depreciation is a tax “expense” where the IRS allows real estate investors to allocate the cost of the investment property over a period of time. This is not a true expense where you are paying money out of pocket, but it does reduce your taxable income just like an actual expense would. Less taxable income means less taxes!
E- Equity
As your mortgage is paid down over time, the difference between what you owe and the value of the property is your equity build up. The beauty of income producing real estate investments such as multi-family apartments is that the mortgage payments are covered by the rental income collected from residents.
A – Appreciation
There are two ways real estate can appreciate or increase in value. One is time. Over time the value of property has historically increased. Of course, there can be fluctuations in value as market conditions change, however the prevailing historical trend is that real estate tends to be an appreciating asset.
The second way real estate can appreciate is what is called forced appreciation, and it is the reason why we love multi-family real estate so much. Unlike residential real estate where property value is determined by recent sales, multi-family real estate is valued based on the net operating income (total income minus expenses also known as NOI). This means that we can actually force the appreciation of the property by either increasing the income or reducing the expenses! When we are evaluating investment property we always evaluate how successfully we can implement a business plan that will increase the NOI of the property and therefore force the appreciation.
L – Leverage
Leverage allows you to do more with the money you have. It means that if we want to buy a property that is worth $100K, we don’t actually need to have $100K to purchase it. A bank will require a much smaller amount as a down payment, and in some cases where we can use creative financing methods, such as seller financing, we may not have to put any money down. The idea behind leveraging real estate is to be able to increase your returns by using other people’s money at first, and not having to put as much of your own capital into buying a property.
But wait! There’s more…
There are a few more reasons why we believe that real estate, or multi-family apartment buildings more specifically, are an IDEAL investment.
- Economies of scale! Single family or small multi-family (4 units or less) can be a great investment, however it is difficult to scale over time. We’ve learned from experience that it’s very time consuming to manage multiple properties spread across the city or across the country. The more units you have under one roof, the lower the operating cost per unit.
Additionally, the impact of vacancies is reduced as the number of units under one roof increases. With a single family home, when your renter leaves your income is $0 until you find a new renter. With a 50 unit apartment if one resident leaves, 49 others remain and still pay the rent.
- The demand for apartment rentals is steady and growing as more and more millennials are opting not to purchase homes for a number of reasons.
- Forced appreciation. We already mentioned this above, but it is such an important benefit of investing in multi-family real estate that it bears repeating. Unlike a single family home, multi-family assets are valued based on the income they generate which means that we have control over the value of the asset. We can impact the income by reducing expenses or generating more revenue, all of which means that we have the ability to force the appreciation of the asset.