“Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments.” —Peter Hernandez, president of the Western Region at Douglas Elliman, founder and president of Teles Properties.
Have you ever wondered why wealthy people hold multifamily properties worth of billions of dollars, throughout the U.S.? Real Estate is attributes to the wealth of 80% millionaires of the world. It provides passive cash flow in the form of rental income. Combine this with the unpredictability and below par performance of stock market in recent years and you will witness masses of people realizing that they don’t have any control over their investments and savings.
So, what is it that multifamily real estate provides to wealthy investors that other investments such as stocks, bonds, mutual funds, cryptocurrencies, precious metals or other commodities, do not provide?
This article discusses the causes that make multifamily real estate an attractive investment option for the wealthy people.
1) Tax Breaks
One of reasons wealthy people invest in multifamily real estate is that it provides the paper benefit of asset depreciation deductions in their taxable income. In simple terms, it means that Internal Revenue Service (IRS) will consider the value of real estate to be depreciating when in reality it may be appreciating in value. Although the asset may have cash flow and value is appreciating, however, tax deduction because of depreciation will allow the owner to show loss on paper. Accounting this loss to your total tax deduction will reduce your total taxable income.
Historically the IRS has set the useful life of resident-occupied real estate as 27.5 years. The section 1.168(i)-1(h) and 1.168(i)-4 of the IRS regulations provides an additional incentive of accelerated depreciation, according to which the structural elements still get depreciated over the 27.5 years, but non-structural items like wall coverings, carpet, fixtures and others are reclassified as personal property. Personal property can be depreciated over a shorter period (typically five or seven years).
Land improvements like parking lots, landscaping, sidewalks, swimming pools, fencing, etc., get depreciated over 15 years.
“Real estate has incredible tax benefits. In certain situations, you don’t have to pay taxes on your gains from investment properties. You can also get a $250,000 tax break as an individual and $500,000 as a married couple.” —Holly Parker, founder and CEO of The Holly Parker Team at Douglas Elliman, award-winning broker who made over $8 billion in sales.
2) Leverage Time of Other People
The core business or occupation of wealthy people takes up most of their time, leaving very little to no time for any other business. Therefore, real estate allows them to save their time and earn healthy returns by investing passively with other real estate syndicators. Syndicators are multifamily real estate investors, who not only do the property and asset management job but also secure finance after finding a great deal. So, in this way, wealthy reap the benefits of investing in real estate while at the same time conserve their time for their core business or occupation.
3) Leverage Money of Other People
How would you like if you can invest at 10-40% below market value, pay 20-25% of your own money and finance the remaining 75-80%, real estate is the only investment that allows you to do it. Banks and other financial institutions really love to finance assets. As a matter of fact, the higher the loan amount, the more attractive it is for the banks, especially if it made to wealthy people having a high net worth, liquidity and capability to pay back in case of downside. With this amount of leverage, wealthy people can easily invest in more properties with less money of their own.
“Real estate is a bankable asset, so you can always leverage it. It also doesn’t tie up a lot of cash. You can put down as little as 10% and use banks’ money to grow your investment. With such low interest rates, that’s like free money. Unlike the stock market, where many factors are out of your control, your investment can’t disappear overnight.” —Dottie Herman, CEO of Douglas Elliman (a real estate brokerage empire).
4) No Personal Guarantee Loans
A multifamily real estate loan of more than $1 million can get you a non-recourse loan. It is secured loan for which the borrower is not personally liable apart from the pledged real estate property, from which it secured. It is different from the usual recourse loan, whereby the borrower in case of economic failure of an investment is liable to pay from personal assets such as residence, car and personal savings. This feature allows wealthy people to protect their wealth and at same time make money from their investments, hence they love big real estate deals.
5) Wealth Preservation
“I only buy certain types of properties, generally multifamily ones in upscale locations that provide consistent cash flow and great potential for future appreciation.” — Grant Cardone, sales expert, New York Times best-selling author.
Human beings will always need a place to live as part of their survival, while technology can replace many jobs. Wealthy people like to preserve their wealth and Investment in multifamily real estate can be great way to do that. Investing in multifamily real estate can generate income for a longer period of time, at the same time 75-80% of the amount is financed for a fixed interest rate for 20-30 year period. It is expected that a real estate doubles in value in a time frame of every 7-10 years. This means that your investment is guaranteed to give you long-term cash flows with the benefit of value appreciation of your multifamily real estate. These factors act as safe haven for parking their wealth in a place unmatched by any other investment vehicle or business endeavor.
Diversified Cash Flow
The risk of default on monthly rent in multifamily properties is spread among multiple tenants. A single tenant represents a relatively small percentage of overall income, and minor changes in occupancy should not significantly affect cash flow. This gives an additional security to your cash-flows.
To Sum Up
Multi-family real estate provide access to easier and better financing opportunities, high appreciation in value, diversified cash flows and the ability to quickly grow one’s rental property portfolio.
Wealthy people seek multiple benefits when they invest in multifamily real estate such as tax breaks on taxable income, leveraging other people’s money which allows them to invest in multiple properties, maintain focus on their core business or occupation, more control on investment compared to stock, bonds and mutual funds etc., and preservation of wealth due to continues cash flows and good rate of appreciation in value of real estate.