Should You Be Investing In Apartment Complexes?
If you’ve read My Story, then you’re well aware that I’m on a mission with three goals. First, I’m in the process of creating enough passive income through real estate syndications to replace my income.
Second, to share everything that I’m learning along the way so you can avoid the same mistakes I’ve made (and continue making). Sound good?
Number 3 and also one of the biggest goals is to help out other struggling health care professionals.
Unfortunately, doctor burnout is getting worse each year. I’ve personally lost several colleagues to this and you may have as well.
Many times, these situations can be avoided by having choices. If you don’t have much money, then your options are limited.
What if we can start creating multiple passive income streams early in our careers which could give us choices such as:
- Working on our own terms
- Retiring in our 40’s or 50’s or earlier
- Semi-retiring and seeing patients 2-3 days a week
Would you be interested?
If so, read on….
What About Single Family Homes?
I have several friends that invest exclusively in single family homes. Many are using the Dave Ramsey method by putting 100% down to buy them.
I initially thought about doing this but then decided against it for two reasons:
- I don’t have time to be a landlord (honestly, even if I did, I still wouldn’t want to be one)
- Hard to scale – Grant Cardone teaches that you should never buy a single family home to rent because it ONLY has one door. It takes too long to cash flow and much harder to scale. He recommends investing in something with multiple front doors. You have to have multiples.
What would you rather own:
One McDonald’s or 30 of them? Exactly. Why do you think network marketing works so well? You’re not dependent on one person. Instead, you’ve got multiple people helping out.
In residential real estate, the cash flow is small and unpredictable. If one becomes vacant, you’re left paying the mortgage.
Also, saving up and paying for each one individually before buying a new one is a long process most of us are willing to take.
If you try and follow this plan, the road to financial freedom will be much harder and longer than investing in apartment complexes.
Most people don’t want to wait 40+ years to reach millionaire status.
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5 Reasons To Be Investing In Apartment Complexes
The Forbes 400 richest Americans include names such as Jeff Bezos (#1), Bill Gates and Warren Buffett. In total, they’re worth close to 3 Trillion dollars. Some 90% on the list retain their wealth in real estate.
Actually, their two main sources for wealth are in real estate (commercial and multifamily) and business.
So why do the wealthiest people invest in real estate, specifically multifamily?
Let’s take a look at a few of the reasons you should be investing in apartment complexes:
1) Tax Benefits
This is one of my favorite reasons why I think high-income earners should consider investing in real estate. I’m all for doing everything I can to legally lower my taxes and real estate allows you to accomplish this.
How? The first way is by depreciation. The IRS allows us to write off apartment buildings (real estate) via a cost segregation study over 27 years. By doing so, we’re able to lower any taxes owed on the cash flow by depreciating the buildings and any equipment sitting on the land.
Each year, the sponsors of the syndication deals I’m in send me a K1 tax form that gives a paper loss despite having a gain.
Certain repairs, capital expenditures (appliances, roofs, windows, plumbing, etc.), can be deducted as depreciation reducing your tax bill on income.
Another huge tax benefit is the 1031 Exchange. Again, the IRS encourages U.S. citizens to own real estate by offering something that can defer taxes.
This strategy allows you to defer paying capital gains taxes on an investment property when it is sold as long as you roll the entire amount you originally bought the deal for into a new deal.
This is how the rich get REALLY rich.
2) Decline In Home Ownership
According to current research, home ownership is under 64% and it continues to decline.
For every one percent decline in home ownership, there’s 1 million new renters.
See the graphic below.
Much of this can be attributed to millennials and baby boomers which make up half of the U.S. population. Both of these groups are also the largest segment of the population that rents.
Millennials make up the largest segment whereas boomers are the fastest growing.
Boomers tend to rent more due to downsizing and they’re also living longer.
Millennials tend to shy away from home ownership and want to stay more mobile living closer to urban areas. Also, many are facing high-debt issues along with tough job markets.
3) Cash Flow
Most docs that I know that invest in real estate do so in order to create an additional positive cash flow stream.
Here are some facts that should get your attention:
- 41% of doctors have less than $500,000 in retirement savings
- Most doctors are relying on only ONE source of income
- Majority are investing only in retirement accounts
- 65% had three income streams
- 45% have four income streams
- 29% have five income streams
Why do you think doctors stop at ONLY creating one income stream?
Here’s a couple of basic formulas you should know regarding cash flow:
Gross rents – expenses = Net Operating Income (NOI)
NOI – debt – long-term repairs = Cash Flow
The goal is to create multiple streams of income through passive investments.
When you invest properly in a correctly managed apartment complex, it produces a positive cash flow in excess of expenses.
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When real estate investors talk about appreciation, they’re referring to the increase in the value of an investment property over time. It’s an important variable which plays a key role in defining the profit from a property for a real estate investor.
Whenever someone is considering investing in apartment complexes, they should pay attention to what improvements are being performed in order to increase the future value.
The syndication deals I’m currently in are value-add properties which produces forced appreciation.
This is caused by the improvements made such as:
- parking lot repairs/replacements
- addition of new facilities (i.e. swimming pool, playground, etc.)
- addition of new services such as a laundry room
By making these improvements, rent can gradually be raised over the normal 5-7 year hold period these deals have before turning around and selling them at a higher price due to this forced apprecation.
Income producing real estate, especially apartments, increase in value either because you physically improve the property, increase the rents, or reduce the expenses (or all of the above).
5) Debt Is Paid For You
Typically apartment complexes are more expensive than single family homes and investors tend to use debt to finance them. This is no different than using a mortgage to finance your home except for one main difference….regarding your home, you’re the one that has to pay the mortgage.
But in a multifamily investment, the tenants pay if off for you. This allows you to build wealth automatically and who wouldn’t like that?
In order to make this a bit clearer, here’s an example of someone that wanted to shift from investing in the stock market and purchase an apartment complex instead.
- Purchase price: $1,000,000
- Down payment: 20% or $200,000
- Mortgage: $800,000
After all expenses, this investor earned 10% a year = $20,000 in positive cash flow
Worst case scenario, if the property didn’t appreciate anything over the next 30 years, this investor would own a paid for property.
Here’s the really cool part about it….the investor also gets back his down payment in the first ten years ($20,000 x 10 yrs) and still owns a million dollar apartment complex that he paid nothing for in years 11-30!
Are You Ready To Start Investing?
If you’re looking for an alternative way to invest your hard earned money besides traditional investing, consider looking into apartment complex investing.
There’s no better investment that can give you the tax advantages and positive cash flow to quickly grow your portfolio.
If you need help navigating the process, click here for my help.