Five Ways Investors Make Money in Real Estate

by John Wilhoit Jr. on

Real Estate Money Tree

People know there is money to be made in multifamily real estate.  But how, exactly, does an investor derive yield from owning apartments?   Yes, there is income from rents.  But what else?  How do we get from a review of the income statement to determining investor yield?  There are five ways to make money with multifamily assets:

  • Appreciation – increase in value over time
  • Income – derived from rents and other income
  • Depreciation – tax benefits
  • Mortgage reduction – reducing debt through principal payments

An investor can potentially benefit from all four categories as a real estate owner. Whether passive or hands-on, these four categories can provide a component of investor yield  What is the fifth?

 Quality Asset Management

The fifth method for making money in real estate is professional expertise brought to the deal by professional asset management.  Specifically; management that is focused on revenue growth,  controls costs and guides capital expenditures.

Controlling Controllable Expenses

The asset management function brings a high level of expertise to increasing direct and indirect income and controlling short and long-term expenditures.  Succinctly: controlling controllable expenses.  Without this fifth “corner” being applied to real estate ownership the other four contributors to investor yield can erode rapidly.

Asset management is what we do best.  Our firm acts on behalf of owners, as the owners representative, engaging property management and other related financial service providers to assure multifamily assets are operating at their highest level of financial efficiency.

Here is an exercise you may want to try.  Take each component from the list above and attach a dollar amount to each one.  Here is an example for a $5,000,000 asset.

  •  Appreciation – assuming 1.5% appreciation, the increase in value each year is $75,000 annually
  • Income – lets assume $25,000 net distributed each year
  • Depreciation – tax benefits.  This requires some research as every one’s tax bracket is different.  Let’s say, $18,000 in actual tax savings for a given year
  • Mortgage reduction – reducing debt through principal payments.   On a $3,500,000 mortgage, principal reduction is around $50,000 annually.
     $75,000
     $25,000
     $18,000
     $50,000
  $168,000

Given a cash investment of $1,500,000 the first year yield is 11.2%.  In this example, asset management would probably raise this to the low teens.  This is an ultra-simplistic example, I know, but it provides you with a guide to determining annual investor yield utilizing all of the components available to the investor.

About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com

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{ 1 comment… read it below or add one }

Thomas Beyer December 24, 2013 at 4:36 pm

I see only THREE ways to make money here. Not five. You actually only show 4. Not 5 ? What is the 5th one ?

The fourth one, tax savings, is not a way to make money. It is only a way to delay paying taxes until you sell. Also you cannot deduct annual real estate operating tax losses from your non-rental taxable income usually !

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