Improved Cash Flow: Multifamily real estate investing can generate a steady source of cash flow from rental income. By leveraging economies of scale and investing in larger properties, investors can benefit from a higher return on an investment relative to single-family investments.
The historical success of cash from multifamily real estate investments has been very strong. Multifamily properties are typically less volatile than other real estate investments, and they benefit from a steady cash flow from rental income and long-term leases. Due to the steady income stream and long-term leases, multifamily investments usually carry less risk than other real estate investments. As a result, multifamily real estate investments have been known to provide high returns and excellent cash flow.
Long-term Appreciation: Multifamily real estate investments can appreciate in value over time due to rising demand for housing. This appreciation can lead to increased equity and a larger return on investment.
The long-term appreciation of multifamily real estate has been consistent and generally positive over the past several decades. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual return for multifamily real estate over the past 10 years has been 8.5% (as of 2019). This rate of return is higher than that of publicly-traded REITs, which have produced average annual returns of approximately 5.7% over the same period. Furthermore, according to the Case-Shiller Home Price Index, multifamily real estate appreciated an average of 5.2% annually from the first quarter of 2000 to the first quarter of 2019. This appreciation rate exceeded that of single-family homes, which appreciated an average of 4.7% annually over the same period.
Tax Advantages: Investors may be able to take advantage of certain tax benefits, such as 1031 exchanges, accelerated depreciation, and deductions for certain expenses.
Depreciation: The most significant tax advantage of owning multifamily real estate is the ability to depreciate the cost of the property. This can result in substantial tax savings over the life of the asset, as the IRS allows you to deduct a portion of the cost of the property each year. Historically, depreciation has been one of the most reliable tax advantages of owning multifamily real estate.
Interest Deductions: Interest payments on loans used to purchase multifamily real estate are tax deductible. This can result in substantial tax savings over the life of the asset, as the amount of interest paid can be significant. Historically, interest deductions have been one of the most reliable tax advantages of owning multifamily real estate.
Capital Gains Tax Exemption: When an investor sells a multifamily real estate asset, they are able to exclude the first $250,000 of the gain from taxation if they are a single filer or the first $500,000 if they are a joint filer. This can result in significant tax savings for the investor. Historically, the capital gains tax exemption has been one of the most reliable tax advantages of owning multifamily real estate.
1031 Exchanges: A 1031 Exchange is a tax code provision that allows an investor to defer paying capital gains taxes on the sale of an investment property, provided that the proceeds from the sale are reinvested in a “like-kind” property. 1031 Exchanges can be used to defer paying taxes on the sale of a multifamily real estate asset and can result in significant tax savings over time. Historically, 1031 Exchanges have been one of the most reliable tax advantages of owning multifamily real estate.
Tax Credits: Many states provide tax credits for investments in certain types of multifamily real estate projects, such as affordable housing. These tax credits can result in significant tax savings for investors. Historically, tax credits have been one of the most reliable tax advantages for owning multifamily real estate.
Cost Segregation: Cost segregation is an IRS-approved strategy that allows investors to reclassify certain components of a multifamily real estate asset as personal property. This can result in significant tax savings for investors, as the shorter depreciation schedules for personal property can result in larger deductions each year. Historically, cost segregation has been one of the most reliable tax advantages of owning multifamily real estate.
Financing Options: Financing options are often available for multifamily real estate investments. This allows investors to purchase and hold properties with a smaller down payment than would be required for a single-family investment.
Financing a multifamily real estate investment is a great strategy because it allows investors to leverage their capital and maximize their return on investment. On average, multifamily investments boast a higher cap rate than other investments, allowing investors to see a higher return on their investment faster. Furthermore, multifamily real estate investments are historically less volatile than other investments and offer a steady cash flow. Investors that use this strategy have seen higher returns than those that invest in single-family homes. According to the National Council of Real Estate Investment Fiduciaries, investors that use this strategy have seen average returns of 9.4% for the past 10 years.
Diversification Benefits: Investing in multifamily real estate can provide investors with diversification benefits. By diversifying across multiple properties, investors can reduce the risk of investing in a single asset.
Diversification benefits are one of the most important aspects to consider when investing in multifamily real estate. Diversification is the process of allocating investments across multiple asset classes, sectors, and geographical regions in order to reduce risk while maximizing returns. Investing in multifamily real estate can provide a number of diversification benefits, including:
Asset Class Diversification: As multifamily real estate is a type of commercial real estate, it offers exposure to a different asset class than traditional stocks and bonds. This can provide investors with a more balanced portfolio and reduce volatility.
Geographic Diversification: Investing in multifamily real estate can provide investors with exposure to different parts of the country, which can help to spread risk and protect against localized market downturns.
Income-Generating Potential: Unlike many other investments, multifamily real estate can provide a steady stream of income through rental payments. This can help to reduce the risk associated with investments that rely solely on capital
Long-Term Investment: Investing in multifamily real estate can be a long-term investment, allowing investors to take advantage of potential price appreciation over time.