Multi Family Investing

Did you know that 10% of the Forbes 400 Richest Americans obtained their wealth directly through real estate? What the article fails to mention is how much real estate the other 360 Billionaires own. It is also estimated that 90% of all Millionaires in the U.S. derived their wealth through real estate also. This alone is a strong case to add multi family investing to your portfolio of assets.

If you drive anywhere around the Houston area you will see apartment complexes. From the higher-end areas like West University, to lower-end areas around Hobby Airport. Over 5.5 Million people call the Houston area home and it is estimated that over 53% of them rent. Couple this with continued population growth and the future looks very promising for multi family investing on demographics alone.

From our experience most people miss the opportunity to take advantage of multi family investing because of two main factors:

1. They are not educated on the advantages.
2. They don't know how to get involved.

That is why Liberty Real Estate Advisors was founded. We take the time to educate investors on how these opportunities are located, analyzed, negotiated, financed, operated, and eventually sold, and introduce you to companies that are buying apartment complexes right here in Houston, TX that you can partner with.

Here is a quick list of just a few advantages of multi family investing:

• Cash Flow
• Equity Capture
• Leverage
• Appreciation
• Principal Pay Down

Let's take a brief look at these five ways multi family investing makes you money.

Cash Flow

Cash flow is the margin you make after paying all the bills associated with the property. It's the revenue you take in minus the expenses you pay out. Whatever is left is the cash flow.

Equity Capture

An advantage multi family investing has, verses traditional forms of investing, is the ability to capture equity at the time of purchase.

Potentially, investors can go out and find deals that are priced below market for various reasons like deferred maintenance, divorce, foreclosure, etc. These investors target and purchase an apartment that has appraised for $1 Million, but can be purchased for $850,000. This creates instant equity in the project of $150,000 that can be realized at refinance or sale.

Leverage

One of the most powerful tools in multi family investing is leverage. Let's assume an investor group targets the purchase of that same $1 Million apartment complex for $850,000. However, instead of paying all-cash for the property, the group goes to a bank and finances 70% of the purchase price. The loan amount would be $595,000 ($850,000 *70% = $595,000) and the partners would have to put a down payment on the difference of $255,000. By putting in less money, the investors are assuming less exposure to the loss of capital. This also allows you to purchase larger properties with better economies of scale.

To really gauge the power that leverage can have on multi family investing is to compare it to other forms of investing like purchasing stocks. If you were to purchase $850,000 worth of stock how much is the stock worth? $850,000 right? Of course if you like to take risks you may be able to purchase the stock on margin, but you still couldn't borrow more that 50% of the stock price.

Using the multi family investing example we would target the purchase of $850,000 worth of real estate with only $255,000 out of pocket (Let's not factor in the equity capture just yet). If we had the same $850,000 to invest, leverage would give us 333% more purchasing power. By investing $850,000 you could control $2,830,500 in real estate value.

Appreciation

We first want to mention that in multi family investing we never recommend making an investment decision based on appreciation alone. When you buy something and HOPE it goes up in value you are basically gambling. Gambling is not investing and is why we never assume real estate will go up in value. Some will say, "Real estate appreciates 5% a year; paper assets go up 6% a year. Why would you want to invest in real estate?" If appreciation were the only thing we were comparing then perhaps their argument would hold water, but you should factor in cash flow, equity capture, or principal pay down. Let's go back to our example.

Let's assume that your stock purchase of $850,000 had a good year and made you 8% or $68,000. In comparison, let's assume your leveraged real estate only appreciated 2.5%. Your return would be 8.3% or $70,763 ($2,830,500 * .025% = $70,763 / $850,000 = 8.3%). As you can see, by using leverage an investor can gain a significant advantage in multi family investing. You will also notice we gave an unfair advantage to the stock appreciation. The stock market, on average, has returned 6.3% on investment. Real estate, on average (in the Houston, TX market) has appreciated 5% annually. Even with this unfair advantage multi family investing is beating the stock market based on appreciation alone, but let's go back and look at cash flow and equity capture.

The profile of an asset valued at $1,000,000 could be a small 40 unit complex generating cash flow around $20,000/year. Using leverage, the cash-on-cash return would be 7.8% ($20,000/ $255,000 = 7.8%).

You also captured $150,000 at closing in equity. Using the leveraged investment amount of $255,000 your return on equity is 58.8% ($150,000 / $255,000 = 58.9%). Thus in this example, the potential first year multi family investing return, based on cash flow and equity capture alone, could be 66.7% (7.8% + 58.9% = 66.7%).

Principal Pay Down

Now let's factor in principal pay down. Every month your tenants are paying down the principal you owe on the property. Most of that mortgage payment you make goes towards interest, but a small portion goes towards principal. On a $595,000 loan that's approximately $8,265/year. Over a 5-year holding period, that could result in an additional 3.2% per year return.

In our simplified multi family investing example, if you add up the cash flow, equity capture, and principal pay down, you could get an annual average return of 69.8% in this simplified multi family investing example. Remember, the stock purchase averaged 6.3% annually. As you can clearly see multi family investing has the ability to produce greater returns relative to other more traditional investment vehicles.

To learn more about how to get involved in multi family investing we encourage you to attend our Why Buy Property Introductory Workshop held weekly. Just click the register button at the top of the page.

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