Last week, we looked at the different metrics for studying returns in multifamily investing. Two of these metrics were cash-on-cash return and average annual return (AAR). This article will explore why the returns in multifamily investing are strong in the context of these two-return metrics.
The high cash-on-cash return is one of the advantages offered by multifamily investing. While many investments offer low dividend returns, the cash-on-cash returns in multifamily are typically 7% or higher depending on the market and specific deal. For example, a million-dollar portfolio in multifamily with 7% cash return would yield $70,000 per year. This means that the cash returns in multifamily can provide the investor with solid passive income without touching the principal balance of the investment.
When it comes to the average annual return (AAR) in multifamily investing, there is also a large benefit over many other asset classes. While the average retirement account might produce returns in the 8%-12% range over a long period of time, multifamily can produce returns in the 15%+ range. While this difference of a few percent might not seem material, the plot below demonstrates the difference this can make over time. After twenty years, an initial investment with 15% return is almost double that of one at 12% returns as shown.
Higher cash-on-cash and AAR, combined with the tax advantages in real estate allows you to keep more of your returns and grow your original investment at a faster pace.
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 check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."