In my last training, I shared why multifamily is far superior to single family rentals. Many single-family owners asked me how they can make the switch to multifamily. This video is going to show you how.
Why Multifamily Investing Beats Single Family
Multifamily properties offer numerous advantages over single family homes. From generating consistent cash flow to building long-term wealth through forced appreciation, multifamily investing can pave the way for financial freedom and security for you and your family. One of the main drawbacks of single-family rentals is the lack of return on equity. In fact, your equity in a single-family property may be stagnant, not actively working for you to increase your wealth. This is where the power of multifamily investing comes into play.
Benefits of Multifamily
By owning multifamily apartments with 5 units or more, you can leverage your equity to generate a steady stream of cashflow, force appreciation through rent increases, and ultimately build a strong financial foundation for the future. Warren Buffett’s famous quote,
“If you don’t find a way to make money while you sleep, you will work until you die, “is so true and it underlines the importance of passive income for wealth generation.”
Like many aspiring investors, I started out investing in single-family rentals only to discover I couldn’t achieve my goals and I just wasn’t getting ahead. Maybe you have a similar story and you want to make the switch from single family to multifamily, but you don’t know where to begin. Well, you’re not alone. Often real estate investors will start off with single family rentals, as is the case with many of the Proteges we mentor at Commercial Property Advisors. Over time they build equity in their rental properties, which can then be used to leverage a larger multifamily property using a 1031 Tax Deferred Exchange.
Upgrade from Single Family to Multifamily with a 1031 Exchange
1031 Tax Deferred Exchange is one of the greatest wealth building tools. This IRS tax code allows you to sell your current property and reinvest the profits into a larger property without paying capital gains taxes. I offer a training titled 1031 Exchange Step by Step Case Study, which provides detailed instructions on how to sell your single-family rental home and upgrade to a multifamily property. By utilizing this tax-deferring method, you can effectively maximize profits, grow your wealth, and scale your investment portfolio to build generational wealth. Here’s how:
Option #1: Buy and Hold for Cash Flow
The first option is to use a 1031 Exchange to reinvest your profits into a 12-unit apartment building for steady cash flow and a solid return on investment.
Example: 12 -unit apartment purchased for $1 million
Down payment: $250,000
Loan: $750,000
Cashflow: $20,000/year
Cash on Cash Return: 8% (cashflow divided by down payment). 8% is a good return on investment so simply by acquiring this multifamily property you are putting your equity to work.
Value Add Plan: Raise the rents $300/unit on all 12 units over 5 years.
Increased Net Operating Income (NOI): $300 x 12 Units x 12 months = $43,200/year
- Over five years you will have increased your NOI by $43,200/year.
- As you increase your NOI, your property value increases. To calculate your new value, divide it by the market cap rate.
- Let’s say for this property the market cap rate is 6%, giving you $720,000 in forced appreciation.
New Value: After 5 years, the new value is $1.72 million.
By simply trading up from your single family rentals to this multifamily you have maximized profits and increased your asset’s value to $1.72 million.
Option #2: Buy and Hold Plus Cost Segregation for Tax Benefits
The second option is to use a 1031 Exchange to reinvest your profits into a 12-unit apartment building, buy and hold for steady cash flow, but also accelerate depreciation and maximize tax savings by offsetting your cash flow and W-2 income. This is done with a cost segregations study, which allows you to accelerate the amount of depreciation you can claim on your taxes. Instead of depreciating it over twenty-seven and a half years, you can depreciate parts of a building over five years. I have an in-depth training where I break down what a cost segregation study is and how to use this powerful tax strategy for multifamily. You can watch it here to learn more: Cost Segregation Made Simple
Using the same 12 unit example with $20,000/year cash flow, you perform a cost segregation study and let’s say you have $80,000 in tax savings.
- You can use $20,000 of that $80,000 to offset your cashflow, meaning you won’t pay taxes on the profits that year because your cost segregation will wipe these profits out.
- Additionally, you can take the remaining $60,000 to offset your W2 income.
Imagine at the end of the year, not paying income tax on the cash flow from your investment property and using the extra depreciation to wipe out your personal income as well! This is why cost segregation is such a powerful tool for the multifamily investor.
Option #3: Sell and Trade Up for Greater Returns with a 1031 Exchange
The third wealth building options is to increase the property value, pay down the mortgage over a 5-year period, sell it and reinvest those profits into a larger multifamily property with a 1031 Exchange.
Continuing with the above example, after 5 years of hard work to raise rents and optimize operations, your property is now worth $1.72 million. Here’s how you can trade up for greater returns:
- You still have a loan, but you have paid it down to $720,000.
- After you sell and paid off your loan, you have $1 million in equity which can be used to leverage into a larger multifamily property using a 1031 Exchange.
- 1 million is 25% of 4 million, meaning you can roll those profits into a $4 million property and defer paying capital gains taxes until you take the profits.
Building Wealth with Multifamily
Ultimately, switching from single family to multifamily investing is a strategic move towards financial freedom and creating a lasting legacy for you and your family. Don’t limit yourself by sticking with single-family rentals. Instead, sell and use your profits to buy multifamily with a 1031 exchange and begin building long-term wealth today. Which wealth building option do you prefer?
- Option#1: Buy and Hold?
- Option #2: Buy and Hold Plus Cost Segregation?
- Option #3: Sell and Trade Up with a 1031 Exchange
Let me know in the comments post or text PETER to 833-942-4516.
Every Successful Multifamily Real Estate Investor Has a Mentor
Every successful multifamily real estate investor has a mentor. Get your mentor here: Commercial Property Advisors Protege Program
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