Real estate offers many benefits and is a great way to build wealth. We look for apartment complexes where we can add value to the property that are big enough to support a full time property management team that consists of a leasing agent and maintenance staff. This spreads out risk and helps achieve economies of scale.
Benefits of Multifamily:
Scalability and economies of scale
Hedge Against Inflation
Property Management company
Simplicity to Buy
Apartment complexes typically take 45-120 days to close due to loan docs, real estate docs, paystubs, insurance, utilities, appraisals, surveys, etc. Whether it is 10 units or 500 units, the process is similar to buying a single family home. While it is a bit of a longer process, many of the hurdles and hoops to jump through are similar.
Assuming the investor is experienced and has a good business plan, lenders are eager to lend when buying multifamily and there are many more types of loans.
Economies of scale
In our opinion, economies of scale are the biggest benefits of multifamily. While there are more units, the amount of work to close on an apartment complex is more work than single family, but much less on a per-unit basis.
These apartment complexes will have one loan, one insurance policy, one tax bill to pay, etc. The overall amount of work is less on a per-unit basis.
There are 2 major tax benefits. While these are not solely for apartment investors, apartment investors love these benefits: Depreciation and 1031 exchange. Depreciation is a paper loss and not an actual loss. Depreciation helps reduce the amount of income (on paper) made in a given year. Depreciation takes into account wear and tear of a property over time and reduces the value of a property on paper. This reduces the tax burden. A 1031 exchange is a tax deferral. The government allows tax deferrals in certain situations in order for an investor to buy bigger properties. The government knows a bigger property will have a bigger tax burden and they will eventually recover taxes. Check with a CPA, financial advisor, or lawyer for more information.
Hedge Against Inflation
Real estate is a hedge against inflation. Market rents will typically rise as inflation increases the costs of goods and services. As market rent rises due to inflation and other factors, your cash flow should also rise, which increases the Net Operating Income. Since multifamily is valued based on the NOI (income minus operating expenses), the value of the property goes up.
A property management team runs the day to day of the property. They ensure the property is properly maintained and cared for. Oftentimes in apartment complexes, there is a leasing agent(s) and maintenance staff onsite. These people work on the property all day long and can address issues in real time.
A good property management team will take care of any issues on the property before they become a large issue.
Real estate appreciates over time. The value of the multifamily properties grow as inflation occurs, market rents rise, and the demand for housing increases. With the opportunities we explore, we can also force appreciation. This allows us to increase the valuation of the property faster than market appreciation.
In multifamily properties, we expect a certain amount of units to be vacant. Vacancy is built in when we look at deals. Depending on the market, 3-7% vacancy is common. The rented units will have enough cash flow to offset the vacant units and still provide a return on investment.
Apartment complexes are a great way for investors to earn money while not having to work on the property themselves. Our passive investors love the benefits of apartment complexes as it is a way to reduce risk, earn cash flow, and be totally passive in the investment process.
This is not tax or legal advice. Check with a tax professional, CPA, lawyer, or financial advisor for more information.