1. Enjoy Income Immediately
Let’s look at stock dividends. Most dividend yields hover around 4% or even less on an annual basis. While that number is certainly better than the current savings account rate of 2%, it’s nothing to write home about. Sure, the stock price could increase over time, but until you sell it that money isn’t realized.
However, when you invest in a multifamily deal, you start receiving income almost right away. Investors are getting distribution checks every month, since the property is making money every month (mainly from tenants’ rents). As a sponsor, I wouldn’t go near a deal that had a 4% return, and neither would my passive investors — not when you consider that we’re looking at an average of 7% cash-on-cash return. Since multifamily return is realized almost immediately, this is a superior investment compared to the stock market. As a bonus, many properties may continue to appreciate in addition to the regular returns.
2. Easy Financing
When buying a multifamily property, you can secure a loan for the purchase at a very low interest rate. In fact, rates are now hovering at historic lows. This is simply not available when buying stocks. In addition, you can refinance the property in order to pull out equity tax-free.
3. Depreciation And Capital Expenditures
Unlike the stock market where you pay capital gains on profits, multifamily properties let you pay little to no tax on capital gains by reducing depreciation and capital expenditures (called CapEx) from the property’s income. This can result in huge profits for investors. CapEx are funds that can be used to acquire, upgrade and maintain a property.
4. Add Value To Your Purchase
Value-add multifamily properties are those you purchase with the intent of making needed repairs or upgrades. Not every sponsor or investor has the ability to do this, but it’s one of the best reasons to consider purchasing a particular property. Adding value helps to justify rent increases, which adds income to your return. It also helps with the property’s appreciation over time.
There are many different ways to add value, from exterior improvements like landscaping and painting, to complete unit upgrades like new kitchens and baths. Adding new technology is another draw for renters, and adding amenities like in-unit washers and dryers is another way to increase rents.
Needless to say, purchasing stocks does not allow you to add any value to it, since you have no control over the company’s management and strategy.
5. Gain Leverage
If you purchase stock on margin, you’ll need about $50,000 in order to buy $100,000 worth of shares. The problem comes in if the stock loses value, which means you’ll have to come up with more cash or the stock will be sold to cover your position.
The beauty of investing in real estate is that you can participate with far less money than stocks. If the property’s value drops, for example, the only time it will be a problem is when the property is actually sold. However, with real estate, you can always buy and hold the property until such time that the value increases.