Why Multifamily Real Estate is an Evergreen Investment
In my last article, I showed you why real estate is the best investment out there – why “the best investment on Earth is earth.” And of all possible real estate investments – single-family, retail, office, industrial, you name it – apartments are the best of the bunch.
If you buy a $4 million apartment complex at a 7% capitalization rate, it will generate $280,000 per year in net operating income. If you put 25% down – $1,000,000 – and finance the other 75%, you’ll have a new mortgage for $3 million. At today’s market rates, you’ll pay about 6% of that $3 million each year – $180,000 – for your mortgage payments, giving you positive cash flow of $100,000, or 10%, right out of the gate. In addition, you’ll generate another $90,000-$100,000 in tax savings after you deduct your operating expenses, deduct your mortgage interest payments, and depreciate your apartment buildings. That’s a 20% annual return on your money before you hammer one nail or paint one board to spruce up the place, which can drive your returns even higher. Now that’s what I call a good investment.
Multifamily real estate is an evergreen investment. People will always need food, water, and shelter – and now, more than ever, people are seeking shelter in apartments. The U.S. home ownership rate is at its lowest level in 25 years, and renter growth is at its highest level in 30 years. Here in Houston, there is high demand for apartments and that demand is expected to increase.
The Baby Boomers – at 78 million strong, the largest population cohort in the United States – are now retiring and downsizing, moving out of their homes and into apartments, and most of them will never purchase a home again. Apartments are being converted to senior and assisted living communities at a rapid rate and that will only continue. The second-largest group in America is the Baby Boomers’ grandkids, the so-called “Echo Boomers” or Millennials. They are graduating from college and moving into the workforce – and into apartments. They are not interested in buying houses and they are waiting longer to get married, and single people are much more likely to live in apartments than married couples. Millennials love renting.
Immigrants now represent half of the population growth in the U.S., and studies have shown that immigrants tend to rent, not buy, when they first arrive in America, and they tend to stay in apartments longer than home-grown Americans. All these are reasons why the National Multifamily Housing Council has concluded that America will need 4.6 million new apartment units between now and 2030 to accommodate the increased demand.
Apartments are easier to finance than single-family investment properties, mainly because they produce cash flow every month, even if they are partially vacant. Multifamily has all the tax advantages of other commercial real estate – deductions for operating expenses, deductions for mortgage interest – but residential real estate has one distinct advantage: multifamily buildings can be depreciated over 27.5 years and not 39, which doesn’t sound like much, but it adds up to significant tax savings. And in a real estate downturn, the constant and consistent demand for apartments can help a real estate investor weather the storm and continue to receive positive cash flow until the market recovers.
If you’re interested in investing in apartment buildings, consult an experienced real estate lawyer who understands not only the law, but the business of multifamily real estate.
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our real estate practice can be found here.