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Why Do The Wealthy Invest in Multifamily Real Estate?

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Have you ever wondered why wealthy people, like Grant Cardone, who earns millions of dollars providing Fortune 500 companies, small businesses and entrepreneurs with an interactive sales training platform, hold $350 million in multifamily property throughout the United States? What does multifamily real estate investment provide the wealthy that other investment vehicles, such as stocks, bonds, mutual funds, commodities or precious metals, do not provide ?

Here’s why.

1) Tax Breaks Due to Depreciation

Most wealthy people invest in multifamily real estate to get the paper benefits of asset depreciation deductions in taxable income. Basically, what that means is that the IRS will consider an asset to be depreciating in value every year even though, in reality, the value may be appreciating. The tax deduction due to depreciation will allow the investors to show investment loss on paper even though the asset may have cash flow and appreciate. This loss will flow through your personal income tax calculation, thus reducing your total taxable income.

2) Leverage Other People’s Time (OPT)

The wealthy do not have much time to devote to business other than their core business or occupation. To conserve their time, they like to invest passively with other real estate syndicators. Syndicators are multifamily real estate investors that find a great deal, get it financed and do the property and asset management. These tactics allow the wealthy to reap the benefits of real estate investing while conserving their time for their primary business or occupation.

3) No Personal Guarantee Loans

An investor can get a non-recourse loan for multifamily real estate loans above $1 million. Non-recourse debt, or a non-recourse loan, is a secured loan (debt) that is secured by a pledge of real estate property for which the borrower is not personally liable. This is contrary to the usual recourse loan whereby investors allow their personal assets, such as personal savings, primary residence and car, to be exposed to lawsuits in case the investment turns south. The wealthy love this feature of big real estate deals. It protects their wealth while making money on their investments.

4) Leverage Other People’s Money (OPM)

Real estate is the only investment where you can buy an investment 15-45% below market value, pay 20-25% of your own money and finance a balance of 75-80%. Banks or any other financial institutions love to finance assets. The truth is that the bigger the loan, the more attractive it is for banks. Banks loves the wealthy’s net worth, liquidity and capability to pay back loans in case of any downside. With leverage, a borrower can invest in more property with a fixed lump sum of money.

5) Wealth Preservation

Technology can replace many jobs. However, every human being needs a place to live as part of survival. Parking wealth inside multifamily investments that generate cash flow provides long-term income. For multifamily loans above $1 million, investors can get up 75-80% in loan with a fixed interest rate up to 30 years. Real estate values are expected to double every 7-10 years. That means a guaranteed long-term cash flow return with a strong upside for multifamily real estate value appreciation. These factors provide a safe haven for the wealthy to park their wealth in a place that any other business venture or investment vehicle does not provide.

 

Do you think so ?

How to Capitalize Apartment Investing to Fund College Expenses

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One of the biggest expenses for any parents is funding their children’s college education. The most well-known education fund is a 529 plan. What not many people know about is something called a Coverdell Education Savings Account (CESA).

The CESA fund is much like a Roth IRA fund, but it was established for education-related expenses rather than retirement. The CESA fund can be used to invest in real estate and grown tax-free.
What I am going to share in this article is my experience in researching and opening a CESA with the company called TrustETC. I will detail how any CESA holder can invest passively in apartment buildings to grow their CESA balance significantly. (Note: I am not a CPA or financial advisor. Please consult your own CPA/financial advisor regarding any specific CESA-related information and how to use the account in any apartment investing.)

Simplified Features of CESA

Advantages

1) Contributions are not tax-free, but the money that grows in this fund is tax-free.
2) The account can be open with any Roth IRA custodian.
3) It can be used for elementary, middle, high school, college education and beyond until the child is 30 years old.
4) Funds can be withdrawn at any time after a contribution is made.
5) Apart from real estate, you can use a CESA to invest in other investments, such as stock, mutual funds, bonds, etc.

Features, Limitations, and Disadvantages

1) There is an income limitation that is imposed for contributing to a CESA. The limitation is the modified adjusted gross income (MAGI) of $110,000 and $220,000 if filing a joint return.
2) The maximum amount is $2,000 per year per child. Anything beyond that will be taxed with a 6% excise tax penalty. Anybody can contribute (e.g., grandfather, relative, etc.).
3) Contributions can only be made before the child turns 18. This does not apply for special needs children.
4) Money must be taken out before the child reaches the age of 30. Beyond that, there is a 10% penalty and taxes on the earnings. A workaround for this is to transfer to another child’s account before they reach the age of 30.
5) The contribution period for a calendar year is from Jan 1st to April 15th of the next year. For example, you can still contribute for year 2014 before April 15, 2015.
6) With the TrustETC IRA custodian, fees to open a CESA are $50 per account and $195 for three years ($65 per year). One cost-saving measure is to open multiple account at the same time because TrustETC only charges a $50 fee for opening a “family” account for CESA/Roth IRA.

Using CESA and Apartment Investing to Grow Your CESA Balance

Scenario: A parent uses three CESAs to invest in an apartment deal. The apartment appreciates after two years, where the apartment gets refinanced. The refinance amount is distributed back to investors.

Let’s assume a parent has three children. Each one of them has $20K each in CESAs. An investor invests in all three CESAs (a total of $60,000) and makes it part of syndicated deal of apartment investment deal by joining with other investors. Usually Apartments are bought with 25% cash down payment while the balance 75% of purchase price is financed by Banks. For example, for a $4 million apartment building, with 25% total cash down payment from investors and the balance 75% is financed. That would be a $1 million (25% x $4 million) cash down payment needed from all investors. A $60,000 CESA investment out of a $1,000,000 down payment in cash will be: $60,000/$1,000,000 = 6% equity investment. That means the three CESAs will own 6% of the apartment building. Let’s assume that after two years, with good apartment property management, the building’s value appreciates from $4 million to $6 million. With a refinancing strategy, there is $2 million in value distributed back to the investors. The three CESAs, which own 6%, will have: 6% x $2 million = $120, 000 in profit. That $120,000 will be distributed to the three CESAs tax-free, as there are no taxes owed on real estate refinances.

Let’s not forget that apartment investing will also generate a cash flow of 8-15% cash on cash per annum and Bank loan pay-down by tenants. I am not going to count that as profit for now in order to simplify the CESA growth message.

With $60,000 in initial Investment, your cash on cash return percentage is: $120,000/$60,000 = 200%. That is $120,000 in tax-free profit for your children’s education, and you still own 6% equity in the building and still have monthly cash flow.

Of course, for this scenario, we’re assuming a $20K investment per CESA. That could easily mean a parent would start investing $2K each per year per child for 10 years. You can always start early from age 1 of a child to have more money in their CESA for investment. The other way to utilize more from an IRA is to combine children’s CESAs with the parent’s self-directed IRA. That will create a bigger equity percentage and profit in a value-adding apartment investing deal.

All the profit from appreciation and cash flow will go back to the CESA/IRA. The account can be used repeatedly for other apartment deals. With this way, a parent can save for their children’s college education tax-free using apartment investment techniques.

IRS website link for CESA: http://www.irs.gov/publications/p970/ch07.html

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