Over the past year, I have been on a quest to find the king of all investments. My goal was to find a way to replace my job income so that I would have more time to pursue my passions. I have concluded that multifamily real estate (apartment investing) is the best investment vehicle to accomplish this goal.
Here are the reasons:
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Strong Passive Income - You can find deals that pay on average 8% or more annually in cash flow. Think of this like a dividend payment from a stock. The rate also keeps up with inflation as rents increase. 8% would be a fantastic dividend rate by itself but that is just the beginning.
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Equity Buildup - Your renters are paying off the mortgage and increasing your equity as you hold the property. You may be able to cash this equity out either through a refinance or sale of the property, further boosting your returns.
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Value Creation - You can add more value by increasing the income of the property. Unlike residential home prices, commercial properties are valued by their income. If you find a property where you can increase rents or operate more efficiently, you have further increased the value when you sell or refinance. The total return (#1-#3) can potentially be 15-20% annually or more.
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Potential for Local Appreciation - If you buy in a location that appreciates over time, this will also further your return. This is similar to a stock increasing in price just because other stocks in the same market sector are increasing. This is hard to predict and even harder to control. This is why I don't like investing in single family homes. I prefer multifamily because income is a big component of valuation and you have more control over it. Since local appreciation can be more speculative, any benefit from this would be an added bonus.
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Tax Benefits - You can get tax advantages in real estate that you could not get with stocks. First, you get a deduction on the property depreciation. Depreciation is not a real cash expense. However, it can be used to deduct from your tax bill on real income. Thus, you pay taxes on only a portion of the income proceeds that you receive. Compare this to a stock where if you get a dividend, you would have to pay taxes on the entire dividend. Second, when you sell the property, you can do a 1031 exchange and defer paying capital gains indefinitely if you continue to buy other property. Compare this to a stock where you have to pay capital gains tax on the sale regardless of whether or not you use the proceeds to buy another stock. Finally, if your property has built up equity over time and you don't want to sell, you can always refinance the property and pull the proceeds out tax-free since this would be considered a loan and not an income. Since the rental income is paying off the mortgage (#2), you can repeat this strategy over and over again and avoid paying taxes.
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Favorable Market Trends - The U.S. market is shifting in favor of renting versus owning a home. Millennials are driving much of this change as they look for affordability, convenience, and freedom. On the other end of the spectrum, Baby Boomers are nearing retirement and will likely look to the rental market for downsizing and convenience. Another major trend is the displacement of various industries by new technology. I believe even certain types of real estate like office buildings, shopping centers, and malls are at risk due to advancements in technology. I like multifamily long term because people will always need a place to live.
Submitted February 28, 2018 at 08:13PM by lukemchung http://ift.tt/2FEtYUI
