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Multifamily Minute Reader Reflections: Why Do You Invest in Apartments?
Our survey participants told us why they choose to invest in multifamily properties.
There are plenty of great reasons to invest in multifamily.
If you're here, you probably already know that.
My curiosity got the better of me last week, so I asked for your "why" in particular. (Well, yours and those of the other 45,000ish Multifamily Minute subscribers.)
Survey Results
Let's dig in.
Motivation for Investing | Percent of Respondents |
|---|---|
Cash flows | 11% |
Appreciation | 9% |
Tax benefits | 43% |
Diversifying investment portfolio | 37% |
The two winning options — in a big way — were for the tax benefits of multifamily investing and to diversify portfolios.
Let's explore the specific tax benefits of multifamily properties today. I don't just mean tax credits (like LIHTCs, for example). There's a whole lot more out there.
Depreciation
Depreciation stands out as one of the most attractive tax benefits for multifamily real estate investors. At its core, depreciation allows investors to account for the natural wear and tear of a property over time. This isn't just theoretical — over the years, buildings do undergo wear. Tthe IRS recognizes this.
By depreciating a portion of the property's value each year, investors effectively reduce their taxable income, allowing for increased cash flow and more capital in hand. Notably, with the added advantage of cost segregation, certain elements of a property can be depreciated faster, offering even greater tax relief in the initial years of ownership.
Mortgage Interest Deducation
For many investors, the ability to leverage their capital and take on a mortgage can supercharge their investment potential. But a mortgage isn't just a tool for leverage; it comes with the added benefit of the mortgage interest deduction.
Simply put, the interest that investors pay on their mortgage is tax deductible, a feature that can result in significant tax savings. This deduction not only makes the cost of borrowing more affordable but also enhances the overall return on investment by decreasing the tax liability.
Capital Gains Treatment
One of the cornerstones of real estate investing is the appreciation of property value. Over time, as a property appreciates in value and is eventually sold, the profit made on the sale is subject to capital gains tax.
The beauty of the capital gains treatment in real estate, especially for properties held over a year, is that these gains are typically taxed at a rate lower than regular income. This favorable treatment ensures that investors keep a larger portion of their profits, making long-term real estate investments even more appealing.
1031 Exchanges
Named after Section 1031 of the U.S. tax code, the 1031 exchange is a powerful tool for investors looking to grow their portfolios without being burdened by immediate capital gains taxes.
In essence, this provision allows an investor to sell a property and reinvest the proceeds into a new "like-kind" property, all while deferring the capital gains tax that would typically be due. It's a strategic move that allows investors to leverage their capital more effectively, continually trading up in value and deferring taxes, potentially until they reach their ultimate investment goals.
Property Tax Deductions
Property taxes, an ongoing expense for real estate owners, can be substantial depending on the location and value of the property. However, the silver lining for multifamily investors is that these taxes are generally deductible.
By deducting property taxes, investors can again reduce their overall taxable income, further enhancing the profitability of their investment. This deduction serves as a balancing act, ensuring that while investors contribute their fair share to local infrastructure and services through property taxes, they also receive a benefit that recognizes the role they play in providing housing.
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Our Previous Survey
Last week, my focus was all on amenities and their return on investment. There was a lot of great feedback after the discussion, as the "winners" were a little bit surprising. Simply put, they were fairly simple. Read more about it.