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I live in New York City, and when I first began investing in real estate, I didn’t fully understand the concept of investing for cash flow. I simply had no frame of reference, and couldn’t imagine how it would ultimately change my life.
You see, in New York, it’s almost impossible to buy property that from day one earns more money in rental income than the cost of buying and managing the property. Therefore, when I bought my first property in NYC, I was willing to break even or even lose a little each month because the market was continually appreciating. Most people think of buying real estate like this — buying for appreciation. That is risky, and in short, I don’t do it anymore.
If the market tanks, not only could you lose what you put in, but you also may not be able to sell — yet you will have to continue paying the monthly expenses. That is some of what happened in 2008, and it wasn’t pretty. The upside is that if things don’t crash, you can make a lot of money, but buying for appreciation is high risk and high reward, much like the stock market. You just don’t know what will happen.
What I’ve learned, though, is that when you buy for cash flow, you are able to collect rental income, enjoy the tax benefits (which in certain cases can nearly double the returns) and preserve your capital. Rents in cash-flowing Class B garden apartments didn’t go down, but rather, many went up in 2008 because people still needed a place to live. Those of us who invested in these properties sat back, collected the rents and waited for the market to recover. That’s why multifamily investing is perfect for me — and why I recommend it for so many others: You don’t have to sell the asset to enjoy income, and the tax benefits are beyond attractive. In addition, investors can build generational wealth.
To make all of this happen, though, you need to make sure of a few things before you make an investment in multifamily property:
1. The property is indeed making money when you purchase it, and it’s making enough to carry the debt and then some.
2. You have at least 25% to 30% equity in the deal on day one.
3. You are able to secure a loan product that you won’t have to get out of at the wrong time. You don’t want to be forced to sell if the market is down.
4. The market needs to have companies moving in bringing good jobs.
5. The jobs need to be diversified. In other words, if the local economy is driven primarily by one single industry, such as Detroit in its heyday, I consider that a nonstarter.
6. The state needs to be landlord-friendly.
I only invest in deals that meet those criteria, so that rules out markets like most of New York and California, unfortunately (which is disappointing, because both are fantastic places).
Most of the time, investors are able to force appreciation by adding amenities, renovating units and running the asset more efficiently, thereby raising the value of the asset. However, buying for cash flow and capital appreciation are the primary objectives.
At the end of the day, the market is something that we as investors simply cannot control. At least with multifamily apartments, we can understand the risks and can mitigate them for ourselves. With the stock market, we would simply be hoping that the market doesn’t crash, and hope is just not a good investment strategy. That is why I believe that passive investing in multifamily apartments is the safest and the most tax-friendly way to retire. I retired at the age of 56 and haven’t looked back.