Multi-family real estate investing is a powerful investment strategy used to create wealth, with many avenues to achieve this outcome. Not only are you able to generate cash flow and passive income, but there are a multitude of tax benefits and improvement strategies available.
NOTE: This article is not to be interpreted as tax advice. Always consult with your tax professional.
Here are 8 ways to accumulate wealth through multi-family real estate investing:
Cash flow is the Holy Grail of real estate investing! When you purchase a multi-family property, you receive cash flow on day one — at acquisition. Cash flow is all of the property's income minus expenses and the debt service. If you budget your numbers correctly, you can accumulate consistent and predictable monthly income as soon as you acquire the property.
Forced appreciation is a powerful wealth-building strategy to add value to the asset and create long-term wealth. It occurs when an investor is able to take control of the investment and increase the NOI (net operating income), decrease expenses, or implement strategic renovations to maximize the property's highest and best use. As a result, the increase in value is "forced" with a hands-on approach to the investment.
Unlike forced appreciation, regular appreciation is the increase of the value of the asset over time, subject to natural market and economic factors without any purposeful moves by the investor. In multi-family, when you purchase a property in an area that is experiencing significant population or job growth, it is likely that demand for real estate will increase, thus increasing the market value. Understanding local market cycles and demand could facilitate your projections of asset value over time.
Real estate has historically been viewed as a way to hedge against economic inflation. Inflation is the measure of how the average price of goods and services increase over time.
Principal reduction or mortgage pay-down is a great way to create equity in a property over time. One of the main benefits of owning rental property is that the tenants pay down the mortgage while you receive cash flow! This can significantly increase your equity and net worth.
Depreciation is considered one of the main tax benefits for an investor; it can greatly increase their return on an investment by reducing their tax liability on rental income collected. Depreciation is the process of deducting the costs of purchasing and improving the building-only asset over its useful life (land is not included). The Internal Revenue Service (IRS) allows the useful building life of residential real estate to be equally depreciated over 27.5 years. This means you are able to claim that deduction as a loss against the property's income.
Cost segregation is the ability to engage a specialist to "break down" some components of the building and accelerate the depreciation schedule from 27.5 years to 5, 7, and 15 years, depending on the improvements. This can significantly boost returns if used correctly.
Holding a multi-family asset for more than one year changes the tax implications. Profits are no longer subject to short-term capital gains tax (your tax bracket); rather, long-term capital gains tax of up to 20%, depending on the length of the hold period, one's taxable income, and filing status. Always seek competent tax professional advice when implicating and understanding tax strategies.
Using debt to finance a real estate purchase is one of the most favorable ways to create wealth, and why real estate is the top strategy to achieve this outcome. When used correctly, you can leverage bank financing through a down payment to purchase a high-value asset. Additionally, with the right interest rate on the loan, you can achieve significantly higher returns, as there is a lower cost of capital to borrow compared to using all cash.
It's no secret that real estate is a compelling vehicle used to create wealth. A multi-family asset is a great investment strategy, with multiple ways to create, grow, and protect wealth. Always consult with your tax professional for tax advice.
Author: Yannik Cudjoe-Virgil
Yannik formed Merlynn Acquisitions in 2017. He has experience in portfolio asset management, real estate investing, investment analysis and financial modeling.
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