The Top 4 Ways a Multifamily Investment Makes You Money

Learn the ways a multifamily investment can generate good cash flow and increase your wealth over time.

With multifamily property investments, you have the potential to benefit from not one, not two, not three, but four sources of revenue that contribute to your ROI. 

In this article, I’m going to cut right to the chase and break down the four sources of returns associated with multifamily real estate investments. Buckle up.

Cash flow from rental payments

If it’s cash flow you’re after, commercial real estate is a pretty attractive option, and multifamily properties are arguably the strongest investment.

A quality, well-managed, strategically located multifamily property provides a steady stream of cash in the form of rental income. I’ll quickly run over how to calculate the cash returns generated from your multifamily investment. Start by multiplying the monthly rent per unit by the number of units to get the gross monthly cash flow. Then, take that gross monthly income and subtract money held back for reserves, in addition to expenses like marketing, maintenance, management fees, and mortgage payments.

Multifamily property rental income returns are usually higher than dividend yields. Although returns may vary widely due to variables like location, you can expect early cash returns to fall between 5 and 8 percent and rise to 10 to 12 percent after a few years. By comparison, stock market returns average between 6 and 7 percent.

Increases in value due to price appreciation

As you likely already know, price appreciation refers to the value of a property over time. When it comes to multifamily properties, there are two primary types of appreciation that can affect the value:

• Market appreciation. Also known as natural appreciation, market appreciation is driven by changes in the real estate market—like when there is an increase in population or jobs or when demand for multifamily properties outpaces the supply.
• Forced appreciation. Forced appreciation is an increase in the value of a property caused by the actions of you, the investor. To increase the value of a property, you increase the income that your property generates, or your net operating income (NOI). Examples of ways to increase your NOI include rehabbing units and then raising rents, charging for parking, and installing extras like laundry units. 

In real estate, appreciation is often where you generate the largest returns. That said, appreciation is also most prone to market fluctuations of these four return sources. 

Principal pay-down 

This is an automatic perk of owning multifamily real estate that often gets overlooked. Principal pay-down is the reduction of the amount owed on a mortgage by partial payments made towards the debt. When you own a multifamily property, your loan or mortgage balance is effectively paid off by your tenants each month with their rent payments. With each principal dollar that is paid on your mortgage, you increase your equity in the property. The rise in equity can amount to a 2 to 4 percent annual return. It’s a slow-but-steady benefit that can really add up over time.

Tax benefits 

Last but definitely not least, the tax benefits associated with multifamily investments are numerous and can be a major component of total returns. Here are two specific strategies I encourage you to take advantage of:

• Depreciation. This is an accounting concept that lets you “expense” a portion of your multifamily property’s physical structure to account for the deterioration caused by exposure to the elements over time. The depreciation is listed on your income statement and reduces your net operating income, which, in turn, reduces the amount of taxes you owe. In the U.S., you can take a depreciation that equals just over 3 percent of the property’s value at the time of purchase each year. As a “noncash expense,” depreciation decreases your income without decreasing the amount of capital available for distribution. 

• Accelerated depreciation using Cost Segregation. It’s usually a wise idea for multifamily investors to do a cost segregation analysis. A cost segregation analysis is a thorough inspection of the property and classification of physical assets into four categories: personal property, land improvements, building/structures, and land. Based on their classification, you may be able to increase the allowable depreciation on certain assets. This can result in significant tax savings and contribute to your investment returns. 

That’s it!

Within our Global Investor Alliance, we help educate you on how to analyze and invest in multifamily apartment syndications to retain and grow your wealth over time. It doesn't take any special skills, just some time and dedication to do the work and take action. 

If you want to talk more about the different ways to realize a superior return on your multifamily investments, feel free to book a free chat with Karen and I.