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Why Invest In Multifamily Income Property?
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If you are reading this page, you are considering or at the very least, interested in real estate ownership. Now, all you need to know is why invest in multifamily income property in Los Angeles.
Why Invest at all?
To actually build wealth, you will need to make your money work for you. Leaders in real estate tell me time and time again that the only way to make great wealth over time is through investments. The government will always tax our earnings but through 1031 exchanges of real property, deference of those taxes is possible long enough to build significant equity.
(there used to be a LINK to "Interview with a Principal" in the copy here - please delete the link in the copy (the bar to the left can stay the same))
Why Multifamily?
Cash Flow
Multifamily properties make money in a few ways.
The first money maker, which everyone knows about, is in appreciation in value. Right now we're in a sliding market due to lack of demand, the credit crisis and other factors, but this market will eventually come back stronger than before. Appreciation is even more a factor now than a few years ago, because now you can buy at discounted prices.
The second money maker, and more often overlooked way to make money with Multifamily, is cash flow and the efficiency of income vs. expenses. Most Multifamily apartment buildings will cash flow enough to pay the mortgage and expenses and have some amount of cash return with 35-45% down payment. That cash return will rise as units turn over and higher market rents and realized. The effect of this is huge. If a building is purchased for 10 times the gross rent when the gross rent equals $100,000, that building would be $1,000,000. If, in a few years time, the building's gross rent is $140,000 and sells for 10 times gross, the value of the building is now $1,400,000.
Low Risk
Multifamily apartments are low risk for the basic premise that people will always need a place to sleep. If a unit is not renting, lower the price and see how many tenants apply. The same is not true for other types of real estate where the property does not cure a basic necessity. Want to find out what units are renting for in the area where you own your investment? Then follow this link and fill out a Market Study Request Form.
Tax Advantages
Did you know that you can write off capital expenses and interest payments on your loan against you annual income? The third money maker in multifamily investment property is tax sheltering. Income Properties are businesses and as with businesses, expenses can be written off. But taxes can play an even bigger role when we consider depreciation. Typical multifamily Investment properties are depreciated over a 27.5 year life span - meaning you can write off the cost of the building at about 3.6% a year. No other investment that I know of, allows me to write off the cost of the investment while the investment appreciates.
Right now borrowing money is still cheap compared to fifteen years ago. Active income or the money you get paid at your job is also taxed at a higher rate than Passive income or the money you make off your investments. To find out what Interest Rates are available today, visit our Rates & Financing section.
1031 Exchanges
By far the biggest advantage to owning real estate is using the 1031 Tax Deferred Exchange to build wealth. This section of the Tax code says that you can sell your investment property and buy another property without paying taxes on your taxable gain. This fourth money maker is commonly termed "Property Ladder" and it has to do with using 1031 exchanges to buy and sell. Simply put this means I can sell a property and buy a property of like kind with the total proceeds if I follow the 45 day identification period regulation and close the sale within 6 months of the date of sale of the first property without paying capital gains taxes. This allows me to effectively leverage the money I would usually spend to pay taxes to leverage the financing of bigger, more expensive properties. The tax is deferred indefinitely until you sell and take the cash. There are a few more rules to completing a 1031 exchange successfully so, contact us if you are interested.
If you would like more information, need help or want to ask our professional advice, fill out the Ask A Question form and press submit. There is no obligation and we will get back to you as soon as possible.
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