Of all the investment vehicles available, we like multifamily for many reasons. In this video, I highlight 4 big ones.
Hi. This is Devin Elder and in this video I wanna talk about why invest in multi-family, or apartment complexes. Same thing. And I wanna talk about four basic reasons that came to mind here as I was thinking about this. There are many more that I could talk about. But these are four primary ones that stand out for me.
Number one is that it’s a basic need. So there are investment opportunities in bitcoin or a new app or a new company or whatever. These are all examples of things that are speculative. So you’re hoping an app catches on or a company, a new business model catches on, or whatever the case is. Real estate is a basic need. So there’s a lot of change and disruption going on through technology primarily that is just completely changing industries and how those work and it’s changing a lot of jobs for people. But real estate is still a basic need that people are gonna need a place to go and rest their head every night for a long time to come. So it’s a fundamental need that people are spending 20, 25, 30 and upwards percentage of their income on every month for their housing. So if you’re investing in multi-family you’re providing a very important service of housing.
Number two is cash flow and equity. So typically these deals are structured to produce cash flow every quarter to the investor. Typically these are projected to be 8 to 10 percent or sometimes a little bit higher annualized returns that are going back out to the investor. We also have an equity component, and this is great because not only are investors getting a distribution every quarter, but when we go in and an operator takes over a property, there’s a business plan to improve that property, lower expenses, raise income, make it a nicer property, improve community, all these things that you go in and do. And what that ultimately does is raise the value of that property up. So there’s typically an equity component in addition to the cashflow. What we usually target on a five year hold on a multi-family investment is a 2x equity multiple. If you put in 100K, we’re projecting to get out 200K within that hold time. So those are two great reasons to invest in multi-family.
Number three I have up here is a tax shelter. I’m not a CPA or an attorney, and this is not specific financial advice of course. But we use something called depreciation on multi-family where you can show a loss some years on your tax return that you can use to offset your W-2 income, and it’s gonna lower your taxable income, which is very beneficial. And depreciation is basically a phantom expense that occurs on your balance sheet without necessarily occurring in real life. So there’s certainly more nuance to that, but there’s tax advantages available in real estate that aren’t available in other investment vehicles, and that’s one of the reasons we love multi-family.
Number four I have here is inflation. This is one I don’t see talked about quite as much. But inflation is happening. It’s eroding the purchasing power of the dollar. So multi-family protects us from inflation in two ways. One, as the purchasing power of the dollar erodes, well rents are gonna go up. So the price of our product will go up year after year and keep pace with inflation. Number two is we’re using bank loans. Our bank is our biggest partner on these projects. So it’s a 5 million dollar property. We may borrow 4 million of the bank’s money and syndicate or raise the rest of the capital from investors. So out of that 4 million dollars, this is late 2017 when I’m recording this video. That 4 million dollar loan is being paid off in 2018, 2019, 2020. It’s being paid off in future dollars that have less purchasing power. So the back is kind of stuck with that loan at a 2017 price, and we’re paying it off with future money, which is worth less. It’s kind of an interesting concept, but between rents rising and being able to pay back the loan in tomorrow’s dollars which have less purchasing power, that gives us a hedge of protection against inflation.
So there are lots of other reasons that we love multi-family investing, but these are the four that came to mind, and I wanted to gear this towards somebody who maybe has not considered this as an investment before. So I hope that’s been a helpful overview on some of the primary reasons that we like to invest in multi-family.