There are many options today in regards to how a person can invest in a multi-family building. This article will simply list out a few of them, and how they work in order to gain more insight into the world of multi-family real estate investing.
Cash is defined as “any money you have sitting in paper currency in a safe, safe deposit box, savings account, CD, publicly listed stocks and mutual funds, not held in any qualified account.” The biggest benefit to using cash is the tax benefit. Naturally, any commercial multi-family project will create a paper loss called “depreciation.” This doesn’t necessarily mean a loss in value of the project. It just means it’s a tax deduction to help offset wear and tear of the property. In most cases, if done so correctly, this paper loss will contribute to offsetting and eliminating taxable income that the property creates in the first several years.
A qualified account is essentially any government approved retirement savings account. These types of account have a level of protection or special consideration from the IRS. A self-directed qualified account is just a source of investment where you retain the tax advantages of the qualified plan but invest in almost any asset.
In the case of brokerage companies, self-directed qualified accounts can be invested in anything that the brokerage company offers or lists. Nearly all of these self-directed qualified accounts will not allow investment in real estate. There are a few exceptions, however. Firms such as Provident Trust and IRA Services can be considered true self-directed firms. They allow you to invest in commercial multifamily real estate that are normally not allowed with brokerage self-directed instances.
There will be times where investing cash is not an option. This is where intelligent borrowing comes into play. The three most common examples of intelligent borrowing are home equity loan or line of credit (HELOC), 401k loan, and a loan from whole life insurance policy.
You would take out a home equity loan or line credit and the proceeds from that would be utilized to invest in commercial multifamily investments. Most times, if you’re able to borrow with an interest rate around 3% while expecting to gain yield of 6% or more, coupled with equity growth, this will play directly into your advantage. The tax advantages of investing with cash remain and, depending on your income and the amount of your loan, you could deduct the interest on your equity line to further improve your returns.
Most 401k plans will allow a loan of up to $50,000 or 50% of the account balance, whichever is lower. There is benefit to this rule. It allows you to convert up to $50,000 in qualified tax-deferred money into cash. If you are able pay the 401k loan back each month with any excess income, then you get back the interest rate at which the 401k loan grows, hold $50,000 in commercial multifamily asset earning income and equity grown, and in cash.
Loan from whole life insurance policy
This option only makes sense if you already have the whole life policy set up and funded. If you do, there is a fantastic return accelerator that you can utilize by taking a loan from your whole life policy to invest in commercial multifamily real estate. You will continue to garner return on your entire investment since its backed by your life insurance policy.
While there are a plethora of investment options available, these have shown to be the most effective in regards to investing in commercial multifamily real estate. Each has its different advantage and should be considered carefully when deciding which route you’d like to follow with your investment strategy.