One of the benefits to investing in both multifamily and real estate in general is that you receive returns in several different manners. This helps to diversify risk even across one asset and allows you as the investor to choose investments whose return profile matches your goals. Today we will review the four ways that multifamily generates returns for its investors.
While we talk about real estate as an investment, it is also a running business. Therefore, as with any business, it will have monthly income, expenses and a profit equal to the first minus the later. This excess cash is the first type of profit investors consider when investing in a multifamily property and is comparable to a dividend as it is often paid out on a quarterly basis.
When buying a property as an investment, it's general wise to look for something in a market that is appreciating. An appreciating market will have signs such as job and population growth, increasing rents and CAP rates moving in a lower direction. This means that even if little to no work is done on the investment property that it will inherently increase in value. Additionally, commercial real estate owners have the opportunity to take advantage of forced appreciation which simply means that as they successfully complete a business plan that increases the properties NOI, they are forcing the value of the property to increase by an amount equal to the NOI divided by the CAP rate..
The debt provided to a multifamily project comes with a set of terms once which is the amortization schedule. Amortization is essentially the time it would like to pay the loan off if one were to continue paying at that give rate. Amortization and loan term are two different things as you could have a 5 year note (which means you must sell or refi within five years) that is amortized over a 25 year time period. Lenders typically consider amortization to be a security measure for themselves as it reduces the finally amount owed by the bower when the note is due should the owner not be able to sell the property for the amount believed. This reduced amount equates to equity in the owners pocket which is realized at the time of sell and therefore is another manner of return.
Ultimately, the returns on an investment should be measured by the net return after paying the associated taxes. Multifamily and commercial real estate in general is unique in that investors often pay little to no taxes on the returns they receive from their investments. This is because of opportunities like bonus depreciation which we have discusses extensively in other articles but in short allows the investor to take a large paper loss which can be used to offset not only the income from that particular investment but also from other types of passive investing returns.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.