I.D.E.A.L. = 5 Letters delivering 5 key elements of unparalleled value. Multifamily provides IDEAL returns 5 ways. Income. Depreciation. Equity. Appreciation. Leverage.
Income is generated by generating income greater than expenses.
Depreciation allows for tax advantages.
Most real estate is purchased with financing. Each month payments include interest and principal. The tenants in the property make payments to the owner and those payments pay down the principal, thus increasing the equity for the owner.
Commercial real estate is valued based on the cash flow of the property and if the rents are below market rates, the new owners have the opportunity to increase rent, growing net operating income and forcing property appreciation.
Other people’s money! Large multifamily properties are typically bought using a mortgage for a large portion of the purchase price. If the property produces an unleveraged 6% return and you can borrow the money at 4%, this is referred to as positive leverage. The greater the gap between the property’s unleveraged return and the cost of borrowed money, the more benefit we receive from utilizing debt to finance the property. The appropriate use of leverage amplifies an investor’s returns.