Apartment investing is an excellent way to build wealth because of the strong cash flow that is provided by owning multiple apartment rental units.
This type of investing builds wealth much faster than owning a single-family home because you have multiple tenants paying each month and a greater cash flow to use to grow your business.
And that is the key: How to grow your apartment investing business so that you build real wealth into your life. I learned early in my investing career when my wife and I bought our first apartment building about 30 years ago and kept on purchasing lots of them over the years.
It was in 2004 that I became a real estate broker in California and wanted to scale up. At that time the single-family investing route seemed daunting and very hard. You had to acquire single-family homes across many states, and then manage them effectively and efficiently. That’s when I discovered the advantages of apartments and have never looked back. It’s been a very exciting and profitable journey even since.
7 steps to build wealth through apartment investing
The following are seven steps to building wealth through apartment investing.
No. 1 – Debt leverage
It’s only real estate where the banks, financial institutions, insurance companies, Fannie Mae and Freddie Mac are willing to partner with you and give a loans up to 65%-80% of the value of the real estate you are purchasing. You have to only put down 35% to as low as 20% to control the investment.
Let’s look at stocks, bonds, precious metals and even cryptocurrency — none of the above mentioned groups will be willing to give loans to purchase these. Real estate is an excellent vehicle of wealth building due to “debt leverage.”
No. 2 – Cash flow
Cash flow is king, especially when it comes to apartment investing. By purchasing the asset in good job growth and better economic markets we realize cash flow on day one of purchase after acquiring with attention to details, due diligence and the actual performance numbers. It’s much better to have the investment that pays you daily rather than speculate on the increase in value over time. We should definitely look at the cash flow generating assets as we purchase them.
No. 3 – Depreciation
Depreciation is one great benefit of owning real estate. It’s a paper loss. Even though the asset is making cash flows due to collection of rents minus expenses and mortgage, we are able to depreciate the structures (usually 70%-80% of the value of the apartment buildings) over 27.5 years straight line. There are other avenues where we can deduct larger depreciation amounts through “cost segregation” in the first 5 to 15 years, thus giving us more tax benefits.
No. 4 – Taxes
As mentioned above, owning apartments is a tremendous tax benefit. Like running a business, we are able to deduct all the expenses incurred in running the management of the apartment, and the benefit of deducting the depreciation, many times brings losses at the bottom line. This happens even when there is a lot of net income generated during the years of performance. This is a huge benefit that is not realized in other means of investing.
No. 5 – Appreciation of property
You can force appreciation in apartments. One way to force appreciation is to buy a poorly managed apartment complex with rents below market and then price accordingly. By improving management and raising rents to market rates, you increase the value of the property and your return greatly increases from the investment.
If you buy in strong rental locations, you will benefit from low vacancies, also. As the neighborhoods improve due to more businesses moving to the area and pent-up demand for the rentals, the market rents increase and the cap rates go down, which also give a boost to the value of the apartments.
No. 6 – Debt pay-down
This is a great benefit. As the rental income and other incomes are collected monthly in apartments, the mortgage (interest on loan and the principal) is paid out monthly. Consequently, the loan balance amount is decreased monthly, which is called principal (loan or debt) pay-down. If we keep the asset over 30 years and pay down the debt for that long, we will own the apartment complex free and clear. Mind you, it all got paid for by the rents collected with no money out of pocket.
No. 7 – Appreciating rental rates in the future
This is another great benefit. As the market improves where the apartment is located, a 2%-4% rent growth is usually expected. In certain hot markets the rent appreciations can even go as high as 7%-9% for few years. But it is prudent to take a conservative approach and keep this appreciation to a lower percentage.
I sincerely hope that you saw the major advantages in apartment investing, often called multifamily investing. With Millennials liking portability and the down-sizing of the Baby Boomers population, the demand for apartment rentals is predicted to be strong and sustained for a long time.