Investing in Multifamily Apartment Complexes: Those who are interested in commercial real estate investment often find themselves wondering what kind of commercial property is available for them to buy. Often, apartment investing is one of the most attractive options when looking for commercial property for sale, especially due to the possibility of multifamily syndication investing.
Fortunately, there is no fixed path you have to take to invest. This leaves open plenty of opportunity for both the first-time multifamily investor and the seasoned veteran as well to capitalize on this opportunity.
If you’re looking at commercial buildings for sale and hoping to snag an apartment complex for investing, take a look at the information below to learn 18 ways you can invest in this area.
Cash and Cash Equivalents
Cash:
Cash is considered to be any paper money that you might have sitting around in your safe, savings account, mutual funds, publicly listed stocks, and so on. Essentially, it is any money that you don’t have held in qualified accounts, which will be touched on below.
Although commercial multifamily real estate is considered to be a highly stable asset class, you should still try to only use investment funds to invest. Cash reserves are better off staying in a liquid bank setting.
One of the most appealing benefits of buying with cash is taxes. Commercial multifamily buildings often bring with them a paper loss known as depreciation. This isn’t a reduction in the value of the property but is instead a tax deduction that helps you offset the wear and tear that will befall the property over the years.
If it is correctly organized, this paper loss can help you eliminate any taxable income created by the property, or at least offset it, in the first three to seven years.
When you include 1031 exchanges and tax-free finance events in efforts to defer a capital gains tax, cash and their equivalents are an appealing source for investors interested in multifamily investments.
Trusts:
Generally speaking, trusts are tools for managing estate taxes and can be used to invest in multifamily properties just like it was a cash investment. The main difference is that the investor serves as the trusted name, while the trustee is the signatory.
There are many different types of trust, including testamentary/living, irrevocable/revocable, and more. It is important to work with an estate and real estate professional to determine which one is best for your specific situation and goals.
Qualified Accounts:
Qualified accounts are usually government-approved savings account for retirement that comes with some level of IRS protection or any other kind of special consideration. A self-directed qualified account is an investment source where you can hold onto the tax advantages of a qualified plan while still having the ability to invest in practically any asset.
You may notice investment and brokerage firms that offer these self-directed IRAs and any plans related to them, but generally speaking, they aren’t totally self-directed. In almost every single instance, a brokerage self-directed account will allow you to invest in anything they list or offer. Almost all of these accounts will prohibit you from directly investing in hard assets like real estate.
Conversely, a true self-directed custodian will let you invest in commercial multifamily real estate as well as a variety of other types of assets that aren’t available through brokerage self-directed situations. All in all, they are tax-deferred accounts in which you can invest your pre-tax dollars and get tax-free growth.
Even so, withdrawals will be taxed according to normal tax rates. These include:
- 401k to self-directed rollover IRA
- Keogh to self-directed rollover IRA
- Self-directed IRAs
- Self-directed SEP-IRAs
- Self-directed solo 401ks
It is important to keep in mind that investments that come from a qualified account won’t receive the paper loss that comes with depreciation. The IRS has decided that because this kind of investment already has a large tax advantage, extra incentives and benefits are no longer warranted.
Still, the ability to invest in a stable multifamily source of real estate comes with its own benefits, including appreciation, principal paydown, income, and more. Real estate that has tax-free growth like this and is paid for with pre-tax dollars is appealing for most investors.
Self-Directed Roth IRA:
A Roth IRA uses post-tax funds throughout the investment, and all of the future withdrawals and gains are tax-free. For stable growth over a long period of time through income-producing real estate, this is a great chance to essentially prepay your taxes up front and then have tax-free income plus equity growth to enjoy for the rest of your life.
There are only a few rare situations where a Roth IRA is not a useful, beneficial way for investors to invest in real estate, so it is commonly recommended no matter who you are.
Intelligent Borrowing
Borrowing can be a beneficial investment source in two specific situations:
- You can borrow money to move qualified dollars to cash without having to pay a penalty; or
- You can have interest rate arbitrage wherein you can borrow at a lower rate to get returns at a higher rate.
Three of the most common instances of intelligent borrowing are:
- HELOC
- 401k loan
- loans from a whole life insurance policy
HELOC:
Though it is not a very common tool, it seems every investor that goes the HELOC route has been pleased with the outcome. In this instance, you would take out a line of credit or a home equity loan and then use those proceeds to invest in commercial multifamily assets.
If you can borrow at around three percent and expect to receive a yield of six percent or more paired with growth in equity, you have many advantages. For one, you can keep the tax advantages that come with investing using cash. Depending on the amount of your loan and your income, you are also able to deduct the interest paid on your line of equity. This can help elevate your returns even further.
401k Loan:
In many cases, you can take a loan out from the 401k plan that your company sponsors. Usually, this is a five-year amortizing loan that has a rate of around 300 or 400 basis points that stretch over the 10-year plan. You can obtain a loan of up to $50,000, or fifty percent of the balance of your account, whichever amount turns out to be lower.
The benefit of this lies in the fact that you can easily convert as much as $50,000 in qualified tax-deferred money into cash. Should you have the extra income needed every month to pay back your 401k loan, then you can have six percent interest paid back to yourself, equity growth in cash and $50,000 in commercial family multifamily asset income, giving you excellent tax advantages.
Loan From Whole Life Insurance Policies:
This is a process that doesn’t always make sense to use unless you already have the whole life policy funded and set up, something that can take as much as five years. If you are set up, taking a loan from a whole life policy to invest in commercial real estate can give you a wonderful return accelerator from what is an otherwise underused resource.
Your interest on these loans goes to your benefit while you keep on receiving the return on your entire investment since it is supported by life insurance.
Underperforming Real Estate Investments
Raw Land with Little Upside:
Unfortunately, it can be quite a long time before you benefit from raw land ownership. Many people have inherited or purchased raw land and then gone on for more than 20 years without getting any return from it whatsoever.
In many cases, they ended up with a 20-year losing investment because of their property taxes. If your land has already appreciated or is otherwise already in the path of growth, now may be the best time to buy assets that bring you income to lock in your gains and continue to enjoy growth down the line. If your land is showing signs of no hope of appreciation, how long do you really want to wait?
Non-Performing or Low-Performing Residential Income Property:
Especially in high valuation markets, this is one of the most common and popular lazy assets to be found. Investors who enter these markets often invest for the first time on an appreciation model. This model is where you purchase an income property to enjoy profit at a future time and hope to get back some or all of the holding costs by way of your net income.
This process can bring in profits, but usually only a third of the time. In a down market, you may lose out, and in a flat market, the income won’t cover all of the rent you need, causing you to lose more and more until the market bounces back.
If you buy and manage a residential income property as a profession, this can be a business that is quite profitable. If you are looking for a passive investment wherein you are the hands-off investor in a deal, this can be a good choice. Commercial multifamily investments are more passive than the other route with the same or even better returns.
Non-Performing or Low-Performing Real Estate:
Though less common than residential investing, many people will still own commercial real estate with a return of equity (ROE) between one percent and two percent. They still maintain it because they were unsure previously about any other alternatives they could put their money toward while still enjoying the same tax advantages, but, if done correctly, multifamily investing will ultimately bring about more stable income than almost any other type of retail investing.
Special Scenarios
These last three investment sources could fit in with the options outlined above, but because they do have aspects that make them unique, they should have the chance to be looked at more closely.
Special Needs Trusts:
A special needs trust is one that allows federal and state tax advantages for any assets that are held in the trust. Though this sits under the umbrella of revocable and living trust laws, it is worth looking at separately. Talk to a professional such as a real estate attorney to better understand your options and see if this is right for you.
In-Service, Non-Hardship Withdrawal:
Very few 401k custodians will advertise this option, and many will try to shut you down if you ask, but the truth is that in-service, non-hardship rollovers are possible to be taken from your 401k. This is an excellent way to enjoy the flexibility you want from your plan model that otherwise likely does not have many good choices.
There are a good number of conditions surrounding this, and you shouldn’t expect your HR department to be all that pleased, but if you are adamant about taking control of your 401k, then this is certainly something to be considered.
Custom Define Benefit/Contribution:
Usually, this is seen with small attorney and doctor groups. Instead of using a custodial company for their 401k, they will set up their defined benefit plan or contribution to bring about greater tax-advantaged deposits, reduce costs and offer better control over investments.
1031-1033:
You can sell your real estate property, like storage, hospitality, retail or office buildings, and move the funds to a new asset, letting you defer the capital gains tax. This has the potential to accelerate your wealth accumulation substantially.
It is also one of the most unique features surrounding commercial real estate investing. Essentially, you are getting an extra percentage paid on your investments in the future without having to do any additional work.
Getting Started
If one of these many paths to multifamily investing sounds appealing to you, you can get started right away by talking to an investing professional to help you determine exactly which of these plans you should follow.