Do you want to get P.A.I.D for investing? Of course you do, that is why we invest. My focus is on cash flow (to provide tax free passive income for wealth and early retirement) and on capital appreciation (for increasing wealth). I consider multi-family real estate to be the perfect investment for various reasons.
- First, it generate extremely good passive income returns.
- Secondly, you can quickly grow and scale your investment side of the cash flow quadrant faster than any other investment.
- Thirdly, you can leverage it and partner with other sophisticated and accredited investors to mitigate risk
- Finally, it fulfills all 4 areas of my P.A.I.D. methodology for wealth generation.
Principle Pay down
When you buy an apartment building, you and the other investors typically put down 25% of the purchase price. The rest is loaned from the bank. Over time, you grow your percent of ownership in the building with the paydown of the principle. This is called amortization.
The great thing about this is you are not paying down the 80% debt like you do on your own house. The tenants are paying that for you. They pay you for the right to live in a safe and clean environment. The amount they pay is sufficient to pay all bills, taxes the bank loan and give you as sizable return on your investment principle.
Typically everything becomes more expensive with time. This is called inflation and since the 1900s, it has been a fact in modern economies. Bread today costs more than it did 20 years ago, though it is essentially the same.
Rent today, even in a 20 year old house, will cost more than it did 20 years ago. So you have inflation working for your investment here. But apartments give you another special appreciation tool called “forced appreciation”.
In apartments you can force the value of the apartment to appreciate by making improvements which raise rents and by lowering expenses. This raises the apartment’s Net operating income and thereby the market price of the apartment community
The key thing you need to be wealthy is passive income. To be wealthy you need to shift the percentage of your income from active income to passive income. Doing this, lowers your taxes, allows for you to quit working and to maintain the standard of living you are accustomed to.
Multi-family real estate pays a higher percentage return on your investment than the stock market and does so with less volatility.
The tenants pay rent to you to live in your apartments. The rent they pay typically increases yearly while the debt payment stays stable. The rent they pay from day one, is sufficient to cover the mortgage, the taxes, the services and the repairs. It also is high enough that you will be earning a nice high single digit to double digit annual return on your investment dollars. Given the tax advantages of real estate, this income is typically tax free and will also enable you to write off income made elsewhere against the depreciation on the real estate. Try to find an income investment that beats Real Estate.
Depreciation is the magic sauce. Sure I said the price of the rents appreciate and the value of the building appreciates. It does. Remember that real estate is a physical asset. So even though the value and the price of the property increases, tax law allows it to be depreciated. The amount of the depreciation is high enough that the income you make off the investment is typically not sufficient to cover the “fictional” loss due to depreciation. Thus, the monthly income and the capital gain you make when and if you sell is typically tax free. Also the depreciation is able to be counted again other sources of income. Thus, you make tax free income and you can reduce your overall tax liability through real estate depreciation.
Real Estate P.A.I.D Wrap Up
So you can get P.A.I.D through real estate by
- Monthly Income
- Appreciation resulting in Capital Gains or bank cash out refinancing
- Tax favored income and capital gains
- Reduced tax liabilities due to depreciation
I am fully invested in real estate and if you want to see the numbers and want to follow along on the journey, read my case studies. If you want to join me on the journey, start by downloading me free e-book and consider joining the Summit Investment Club.