What is multifamily investing? How do I get started investing in multifamily? How can multifamily provide me with passive income? How do I get paid? How do I know a good investment from a bad one?
These are all great questions that we will dig into in this article and subsequent articles. But first, we would like the thank you for taking the time to visit our site and to learn about who we are, how we give, and hopefully how we can help you on your path to early retirement, financial freedom, or just a little more passive income than you had last year.
So you want passive income and you want to invest in multifamily assets to do it? If that’s the case, let’s dive in to how you can create your first passive income stream with multifamily.
We would like to start with one of our favorite quotes regarding alternative investments.
“Bet on the jockey, not the horse.”
Everyone wants the home run, the great deal, the instant retirement through passive income this year. And, while unfortunately it is not that easy, multifamily is a phenomenal vehicle for passive income investing for a number of reasons.
The tax benefits. Here at Well Capital, we are not CPA’s, so we recommend scheduoing a consultation with a CPA to assess how the tax incentives for multifamily investors would apply to your personal situation. At a 10,000-foot view, the U.S. government does not want to be in the business of owning and operating apartment complexes to house the American people, so they have created lucrative and advantageous tax incentives for those willing to step in and assume this role in the American economy. While this does include the 1031 Exchange that many people know of and already understand, that is just scratching the surface of the wealth-accumulating incentives provided to operators AND passive investors in multifamily.
You do not have to sell to make money. Fundamentally, this is an issue with the stock market and, from our perspective, the entire financial services industry. You must get off the ride and pay Uncle Sam if you want to receive your profits. Yes, dividends are available with some stock investments, and yes, there are other alternatives out there that could be considered exceptions as well. But it is our belief here at Well Capital that no other investment vehicle provides near as favorable of a risk-adjusted return profile as multifamily investing. One of the best aspects of this investment strategy is that you are paid what is called a “preferred return” while you watch your investment grow. It depends on the operator, age, asset occupancy upon purchase, and other factors, but the industry standard is 5-10%.
Let’s take a moment and appreciate this..
Imagine BEING PAID 5-10% to watch your money grow. What other investment strategy offers this? Now imagine that vehicle having built-in tax incentives that allow you to reduce the taxes you pay on this income.
Return of principal vs sale
So, 1031 exchange is a buzz word that is commonly known, even by many who are not active in this space. But our business model is not built around selling. It is built around holding and producing generational wealth for our investors. The way we go about this is refinances.
When we increase the value of a property, we then have more equity in the deal. Refinances allow us to access this growth in property valuation, without realizing the taxes on the new value. This is possible because, no different than your home, when you go to a bank to refinance, they are technically returning your money to you. Think of it this way – if you only had to put 20% down, but elected to put 40% down, that is your money sitting in your home’s value in the form of equity. This works if you put 20% down and your home goes up 20% in value as well. Accessing that equity is not a taxable event. Well, the same is true on larger assets. The difference is, we can force the increase in property value. We do this by renovating units and renting them at a higher monthly rent, which grows the property’s income and in turn grow’s its value in the marketplace.
What is so exciting about this tool is that it gives us the ability to access most of the value we create, without selling the property. This is even true if we are pulling out more than we originally put in to purchase the deal!
We are paid for performance, not placement
We do take a fee upon closing the deal, to compensate the operational team for the sourcing of the deal, the equity, the structuring of the opportunity, as well as the initial takeover efforts and the years of operational experience that we are bringing to the deal. That being said, acquisition fees only make up a small portion of our operator compensation. The majority of an operator’s compensation is based on performance, typically 80-85%. The remainder consists of the acquisition fee (discussed above) and an asset management fee that is paid out annually for the continued oversight of the investment.
We believe in being up front and honest about when and how we are compensated, and our model is built to align our interests with those of our passive equity partners. Instead of being paid based on how much of your money we manage, we are paid based on our ability to grow your investment, which is how we believe it should be.
Depreciation/Cost Segregation
We briefly mentioned the tax benefits of multifamily investing earlier. These tax benefits are typically the result of what is called cost segregation, which is a form of depreciation that allows portions the depreciation to be accelerated into the early years of an investment. For passive investors, this can often exceed year 1 depreciation amounts that are equal to 80-90% of the capital contributed to a deal. It can even surpass the contribution amount on certain deals. This means on a $100,000 investment, you may receive as much as $100,000+ in depreciation the first year of your investment. While this can only be applied to earned real estate income for many passive investors, those who are already active and primarily employed or working in the real estate sector, there could be opportunities to apply this to their primary source of income as well. If you are interested in learning more, we would highly recommend contacting a CPA to discuss your personal situation and how depreciation can be applied to your personal financial situation.
There are many other ancillary benefits of investing in multifamily for passive income and to achieve your personal financial goals. Whether you want an early retirement, or just consistent passive income to supplement what you are already making, multifamily is a proven vehicle with strong historical performance through both favorable and unfavorable economic climates. If you would like to learn more about our past offerings, performance, our work towards ending the water crisis with Charity Water, or just this asset class in general, we would love for you to join the Well community. Subscribe here to join the community and click here to see our past offerings.