You’ve worked hard and you’ve saved a tidy bundle. Perhaps in the bank, in a 401K, as equity in a property or maybe a self-directed IRA. Perhaps any combination of these options and more.
Let’s say that you’ve got a respectable net worth. Now what?
Do you leave it in the bank, sitting in equity or at the mercy of the stock market? Is it possible to turn that capital into positive cash flow, get your capital back again within a reasonable time frame and still have that extra stream of income?
Of all the investment choices, where can you find something that gives you a great return, tax advantages and security?
Your Options:
Whether you’re a seasoned investor or not, you want to find an investment vehicle that does all of this and has one more advantage: your Cash on Cash return has to beat inflation.
Your Cash on Cash return is simply the amount of cash flow you receive divided by the total amount of money you invested. For example, if you invest $100,000 and you earn $3,000 annually, then you have a cash on cash return of 3%.
This is the problem with putting a big chunk of change in the bank today. Even though you may be wise to save, you’re actually losing money, and here’s why:
- If the average inflation rate is around 3%, it means that your money is losing 3% of its purchasing power each and every year.
- At the same time, the average savings account pays at or below 1% – meaning you’re still losing 2% of your money’s buying power each year.
- Even in a CD or other higher yield savings plan, you may get a 3% return. While you don’t lose, you also don’t gain… and what happens in a recession?
Oh yes, and there’s something else to consider. You have to pay tax on interest income on a savings account. This can cut your gain by 30% – turning that single digit interest rate into an even less attractive prospect.
For long-term wealth creation the bank is clearly not IDEAL – so what are you left with?
- Passive stock market plans like a 401K or an IRA.
- Purchasing stocks on your own.
- Investing in a business.
- Investing in real estate.
You probably know about the stock market. While you can get pretty decent returns from your 401K or IRA, these are still at the whims of the market. Think back to the fall of 2008 and what happened to everyone’s mutual funds or retirement accounts when the market collapsed…
Even if you take an active role by buying stocks on your own, it’s still pretty risky.
There’s nothing wrong with this – provided you’re not using your own saved money. If you want to be an active stock investor, it’s best to use money earned from a passive investment class like real estate.
As for investing your capital in someone else’s business – this can be very lucrative if the business succeeds.
However, once again, you may not have very much control over this outcome and there certainly is risk.
So what would be the most IDEAL investment possible? What could you invest in that would give you maximum advantage with minimum risk?
Apartments give you every advantage you could want and then some
Here are some advantages that make apartment complexes the IDEAL investment:
- A stable asset that produces income and cash flow.
- Income determines value.
- Ability to quickly increase income.
- Rapid capital exit through sale or refinance.
- Ability to leverage the asset and minimize initial cash outlay.
- Huge tax advantages that vastly limit tax liability.
- Considered passive income and taxed at lowest possible rates. Basically, instead of being added to your earned income, passive income is taxed on its own as if it were your only income.
- Can avoid capital gains at sale through a legal tax-free exchange.
- Easily managed from inside and out.
- Complete control.
A working example:
To illustrate this point, let’s use a simple working example. A 200 unit apartment complex that is selling for $5.5 million.
How did the seller arrive at this price? It’s simple. You take the property’s gross income and subtract all operating expenses as well as taxes and insurance in a given year. Then you’re left with the Net Operating Income (NOI).
When calculating NOI, you don’t include debt service or your mortgage payment. There are several reasons for this – the biggest being that the debt you place on a property is your expense or obligation, not the property’s expense, and therefore is not considered part of the operating cost of the property.
Next, you then divide the NOI by the market capitalization rate (cap rate) determined by the market. Any good real estate broker can you give you guidance on the market cap rate.
For our example we will assume the market cap rate is a “10 cap” or 10%. So this $5.5 million purchase price means that the apartment complex has an annual NOI of $550,000.
Okay, now we have to buy it, right? Generally speaking, banks and other lenders will lend up to 75% of the value of a property. So what this means is that we need $1,375,000 to buy this property with a mortgage of $4,125,000. Let’s factor in another $200k for closing costs, legal fees, inspection, appraisal, etc. for a total acquisition cost of $1,575,000.
Let’s also assume the mortgage payment is $250K each year, leaving us with a $300,000 positive cash flow after all expenses and debt service.
Follow me so far?
Of course, you may not do this on your own, you may be part of an investment group that pools money and resources. However, let’s just take a look at things simply to find out what you’re earning:
$300K is about 19% of that initial $1.575 million. Not a bad return on your cash, is it?
That means that if you do nothing else, you’ll have your investment capital back in little over 5 years.
Can you say the same for a bank, stock program or somebody else’s business?
What about taxes?
Yes, we have to pay Uncle Sam. Guess what – we get a special break from the IRS with owning rental real estate like this 200 unit apartment complex. Believe it or not, it’s actually possible to vastly decrease or eliminate the amount of taxable income through a nice tax accounting entry called tax depreciation.
Without going into huge detail now, it’s possible to take an annual tax depreciation write-off. In this example let’s assume the depreciation write-off is $200K.
But wait… the property made $300K – what happens to my taxes? The $200k tax depreciation expense reduces the taxable income to $100k.
Sometimes the tax depreciation expense could completely eliminate all of the annual taxable income.
You should know that this is real, it’s legal and sanctioned by the IRS.
NOTE – There’s no guarantee that every apartment will have this big of a depreciation write off. This is just an example to show what could happen.
And even if you’re one of 10 investors invested in a deal, the allocations get divided by 10. You end up with the same allocated cash flow, phantom income from money you don’t have to pay the IRS and more.
Growing income
There’s really a lot to say about why buying apartments is the IDEAL investment, yet this is supposed to be a short report, so we’ll go into one more small advantage before we say good bye.
Like any rental property, it’s generally common for rents to increase each year. Well, when you do this with 200 units at a time, even if the rental increase is only a few dollars, it adds up to a big raise, doesn’t it?
Do you know what else is great about raising rents? It raises the value of your property, or builds equity, every time you do! Why?
Remember – income determines value. So if your apartment now has an annual NOI of $650,000 after a few years of raising rents, it’s now worth $6.5 million ($650k NOI/”10 Cap”). You’ve created equity and you can sell or refinance and get your initial cash back and still have an awesome and potentially tax-free income.
So now what? You do it again!
This report has only brushed the surface of what is really a tremendous investing iceberg. To learn more about apartment investing and how you can get into one of the investment world’s most lucrative games, get in touch with me at the contact information below and feel free to ask anything you want.
We’re looking for people just like you to join with us and scale the heights of financial freedom and security that only IDEAL multi-family apartment properties can provide!
Now What?
With the knowledge you have learned in this report, you may think it sounds too good to be true to create massive wealth with apartments.
The next logical step is for us to connect so I can answer any questions you may have about investing in apartment buildings. Let us block a time to speak.
Please call 715-797-2557 or email me at curtb@cambecapital.com