WHY YOU SHOULD INVEST IN APARTMENTS
Over the years, investing in apartment buildings have proven it’s stability as an investment. Four decades have past and the multifamily market has enjoyed several years of rapid growth and seems poised to continue to grow in 2017.
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In addition to the increasing demand, population in the US is set to exceed 60 million in the next 25 years making apartments a worthy investment. The graph showing is the projected forecast for the year 2016 to 2020 on the population growth in the US. Nearly 4 million people are turning 18 each year.
Once lumped in with single-family residential, multifamily (aka apartment buildings) is now firmly entrenched as one of the four major commercial real estate asset classes alongside office, retail and industrial. The asset class now accounts for around one-quarter of all US commercial real estate investment and is occupying a growing share of institutional investor’s portfolios.
Coming out of the 2008 Great Recession, multi-family properties (i e apartments) became one of the most popular asset classes. As a result, multi-family recovered faster and has performed better than most other real estate investment niches over the last several years. However, long before the Great Recession, multi-family properties had been a staple for both individual investors and institutions like REITs and insurance companies.
For individual investors, owning income-producing residential real estate is a proven way to create financial freedom. It’s a timeless asset that serves an essential human need, so it’s in demand in both good times and bad. There are several reasons why multifamily is considered by many to be “best in class” within the investment real estate world both for investors in the property AND investors in the paper (the mortgages that fund the property).
APARTMENTS & TAX BENEFITS
Apartment operators can typically raise their rents once per year as leases expire, subject to local market conditions. As rents increase, the value of the property increases with it. As mentioned, apartments are valued off of a multiple of net operating income: ( is Gross Rents Received fewer Expenses). The NOI is what is used to make your mortgage payments. As in any business, lowering expenses and increasing income will increase your net operating income. Something as simple as moving the trash bill from the landlord to the tenant can increase the value of your investment by several thousands of dollars.
This is because a small increase in income per unit can be a substantial amount for an entire complex. Even more exciting is that an increase of income can lead to a substantial increase in equity ( For example, if you own a 50 unit apartment building and you increase the income (without incurring any additional expense) by $20/M per unit, you have created an extra $1000 per month. At a 10% cap rate, you have created an additional $120,000 in value. A small movement to income can have a large impact to value.
Depreciation expense is one of the few gifts the government gives us. It’s essentially a noncash expense apartment owners use to shelter their income and reduce their tax bill. Apartments are considered residential and enjoy a slightly faster depreciation schedule than commercial properties 27 vs 39 years). This means more deduction per year to offset the income tax on your positive cash flow. With large apartments, you are also able to perform an engineering accounting study called “Cost Segregation”. A Cost Segregation study consists of having a team of engineers to determine the useful life of various components of the apartment. For example, the doors of the apartment may only have a 5-year timeline so you can depreciate their value on a faster schedule.
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This breaks up the total value of the apartment into either 5, 7, 15 or 27.5 years, allowing you to depreciate much more each year. Currently, the government also is incentivizing apartment owners with Bonus Depreciation, allowing all of the 5, 7, 15-year schedules to be depreciated 100% in year ONE! This alone has been attracting many high net worth investors to multifamily The bottom line is less tax and more after-tax income.
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