Investor Quarterly™ June 2016 - Page 18

Why MULTI-FAMILY Apts Are... CRUSHING The Market 18 Have you noticed all the real estate television shows are focused solely on fixing and flipping, and give no love to buying multifamily properties? I get it that fix and flip is sexy and produces great T.V., but does it qualify for a great investment or create generational wealth and passive income? We are going to tackle this question as well as why multifamily is crushing it and how you can jump in with both feet and join the party. What are the characteristics of a great investment? (Multifamily Assets meet all three criteria) investor to control more assets with less of his own capital, which leads to an explosion of wealth. 19 3. Control: I thrive on being the CEO of my own life, and multifamily real estate has allowed me to take control of my decisions and destiny. I control who works for me, how much the rent should go up, where to buy, and how much needs to be reinvested into a property. I want to control my investments, and not relinquish the control to some dude sitting in a boardroom who’s thinking about his next round of golf. This control has allowed me to explode MY net worth and continue to grow the multifamily portfolio. I have noticed a couple of stark differences between multifamily real estate and other strategies. First of all, multis provide a monthly paycheck that we refer to as passive income or cash flow. I also call it a yield on my investment, and it is one of the most important reasons to invest in any type of real estate. Multifamily is just the best vehicle to achieve cash flow. 2. Liquidity: Initially, real estate falters on the second criteria. So how do we tap into the equity of our property? We refer to the strategy as “refinancing” a property and it is one of the main reasons why multifamily real estate is crushin it. 1. Leverage: The rocket fuel to creating massive wealth. There are very few investments where you can invest as little as $150,000 in capital and control a $1,000,000 asset. Try asking your financial advisor to extend you this type of leverage. I guarantee the next thing you’ll hear is a click on the other end and your phone line going dead. The goal of multifamily real estate is to increase Net Operating Income (NOI) by increasing the gross income and by decreasing the operating expenses. NOI is simply the gross income deducted by the operating expenses. Multifamily real estate allows the operator to force the appreciation of the asset by driving the NOI upwards. You receive all of the benefits; cash flow, tax benefits and appreciation. Why would a lender require a small down payment to acquire real estate? Simply put, the buyer is acquiring a revenue stream that covers the expenses of the property and throws off excess cash flow. The bank feels safe and protected with real estate. Bottom line: Multifamily real estate allows the Refinancing is an excellent strategy to access the equity you have accumulated in a property. Our infographic highlights the steps we took to refinance a property and withdraw over $1,600,000 tax-free. (PUT IN INFOGRAPHIC TO 1.6 MILLION). Dad always told me “It’s not what you make, it’s what you keep!” Secondly, multifamily real estate offers tremendous tax benefits. The government in their infinite wisdom realized there was no way they could provide adequate affordable housing. The solution was to provide huge incentives to real estate owners to step in and get the job done. Depreciation is an enormous tax benefit to real estate investing, especially when it is coupled with a cost segregation study. [Depreciation is basically a non-cash expense that allows owners to take a deduction on the income collected, thus lowering your tax obligation. I love the idea that my asset is appreciating while I get to depreciate it for tax purposes.] The government also allows owners to employ cost segregation studies whereby the owner identifies personal property assets that are grouped with real property assets, and separates out personal assets for tax reporting purposes. What does this mean? You are accelerating de- preciation on many items from 27.5 or 39 years and reclassifying them to a shorter time period, as short as five, seven or fifteen years. You are writing off a larger portion of your depreciation expense and realizing more losses quicker. Remember what my dad said, it’s what you keep and cost segregation is the icing on the cake in multifamily real estate. Finally, multifamily real estate offers the owner an economy of scale unparalleled in any other strategy. We love the fact that we have larger buildings with more tenants under one roof, versus having multiple single family homes scattered about, which increases the management and expense burden. If we have a vacancy in one of our complexes, chances are that the rest of the tenants can pay the mortgage. We are limiting our down side risk by having more tenants. A vacancy in a single-family home equals no rent that month, and guess who’s on the hook for the payment? You can run your apartment complex like a business and scale up operations by hiring full time employees. My true success came when I stopped unclogging toilets and hiring full time maintenance to handle day-to- day operations. I was able to focus on managing the asset and buying more property. Now that we’ve shown you why multifamily is the place to be, in the next article we will describe the four phases of the real estate cycle and discuss how to take action with a list of tasks. Finally, take action and educate yourself on the power of multifamily investing. If you have any questions or want to take the next step, visit us at Jake & Gino. Let’s crush it together!