Advantages of Investing in Multifamily Real Estate
Smart investors know that real estate is a solid investment. “They aren’t making any more land,” as they say, and property values in residential areas generally appreciate over time. In addition, rent becomes almost pure profit after the initial cost of your mortgage is covered. Some investors choose to purchase single family houses or homes to flip or rent. While that may be right for some people, multifamily real estate such as apartment complexes provide distinct financial advantages over having several properties spread out. Here are some of the major benefits.
Easier Maintenance Than Multiple Properties
If you owned 12 houses, as a landlord you would be responsible for 12 separate furnaces, air conditioners, electrical systems, plumbing systems, and homes that may need snow removal or lawn care. You may be lucky enough to have a handyman or maintenance person willing to cover each of your properties, but if not, you’re either paying individual vendors for each visit, or having to handle the jobs yourself. On the other hand, if you own a 12-unit apartment, you will likely be able to take one hit in the event of a system failure or weather event.
Depreciation Tax and Cost Segregation
The IRS likes investors in the multifamily real estate business. It’s a win/win; communities need rental properties, the economy needs people to put money back into the system, and so on. As an incentive to this, the tax agency gives two significant benefits to people in this line of work: depreciation tax and cost segregation. In broad, general terms, depreciation tax figures that the physical aspects of a property will depreciate over time (even though the land they sit on does not.) A calculation is made over a 27-and-a-half-year advanced period to determine the property’s worth, and the investor is taxed on that amount. Better still, cost segregation allows for the depreciation of physical assets within the building, like fixtures, appliances, and cabinetry, and provides a further deduction for those items as well.
Multifamily real estate owners reap another benefit at tax time, essentially because they have so much cash invested into their property, it’s considered debt. Debt is a scary word, but in this case it’s good, because it’s tax-deductible. Let’s say you have $100,000 tied up in a rental property. That $100,000 is subtracted from your taxable income, in what is known as amortization!
The tax advantages and logistics favor investing in multi-unit properties. We’ve only scratched the surface of their earning potential!