The Importance of Diversifying your Investment Portfolio

Are You Looking for an Alternative to the Stock Market?

If you want to build your wealth, which is the better strategy? Are you looking into venturing into stock markets or investing in real estate

According to the U.S. Census Bureau, 65 percent of American households are owner-occupied so 35% of the population rents. The Bureau of Labor Statistics reports that 55 percent of American workers participate in an employer retirement plan. If you’re one of them, you’re probably familiar with the stock market.

However, if you want to double down on either sort of investment — or if you’re new to investing and can’t decide between the two — it’s essential to understand the benefits and drawbacks of each method.

Real Estate Investing

Residential assets, such as your home, rental properties, or flipping homes to buy and resell for a profit, and commercial properties, such as apartment complexes, office buildings, and strip malls, are the two main types of real estate investments.

The Advantages

  1. Real estate investing is not hard to understand. 

While the task of purchasing a rental property can be daunting, the fundamentals are easy to understand. First, you buy a property, manage operations and maintenance then try to sell it for a higher price. Furthermore, having a tangible asset gives you a greater sense of control over your investment than purchasing slivers of ownership in firms through stock shares.

  1. Real estate investing is safer, especially when it concerns debts. 

You can invest in a new property with a 20% down payment or less and finance the remainder of the cost with a “mortgage,” sometimes known as a “loan.” Margin trading, or investing in stocks using borrowed money, is hazardous and should only be done by experienced traders.

  1. Real estate investing serves as an inflation hedge. 

When you own a real estate property, you are generally protected from a decrease in the purchasing power of money because the cost of houses and rents generally increase along with inflation. 

  1. Real estate investing has tax advantages to property owners. 

With your primary residence, the mortgage interest paid on the first $1 million in mortgage debt may be eligible for a tax deduction. When you sell your primary house, you may qualify for a tax advantage, such as an exclusion that allows you to avoid capital gains taxes on net proceeds of $250,000 if you’re single (or $500,000 if you’re married and filing jointly).

With investment property, you may be able to avoid capital gains by using a 1031 exchange if you sell the commercial property (if you reinvest proceeds in a similar type of property). Depreciation, or writing off wear and tear on the property, can earn tax savings for investment properties.

The Disadvantages

  1. Real estate investing can entail more work compared to stocks.

While it is easy to understand what property investment is all about, it doesn’t follow that the operations involved in its maintenance, especially rental properties, are also just as simple. Property ownership necessitates a lot more sweat equity than buying stock or stock assets like mutual funds.

  1. Real estate investing is costly and not easily converted to cash. 

Even when borrowing cash, investing in real estate necessitates a significant initial outlay. Getting your money back from a real estate investment through resale is significantly more complex than purchasing and selling stocks with a few mouse clicks.

  1. Real estate investing transaction costs are high.

A seller might anticipate paying high closing fees, accounting for as much as 6% to 10% of the sales price. Compared to stocks, that’s a significant discount since many brokers don’t charge commissions on stock trades.

  1. Real estate investments can be hard to diversify. 

When it comes to real estate investing, location is essential. The economy of a specific are could slump affecting your real estate investment.. Diversifying real estate purchases by location and type (for instance, a mix of residential and commercial) necessitates significantly larger financial resources than the ordinary investor has.

  1. Real estate investment returns are not sure. 

The 2008 financial crisis serves as a reminder that while it is true that prices of property generally increase over time, there is still that risk of selling property at a loss. 

Stock Investment

Stock is the total shares into which ownership of a corporation is divided. In proportion to the total number of shares, a single share of stock represents fractional ownership of the firm.

 The Advantages

  1. Stocks are easily converted to cash.

While your investment in real estate would have cash locked up for a few years, the sale or purchase of company shares are good as one once you act on it. It’s also easy to know your investment value at any time. 

  1. Stock investments are easier to diversify.

Few people have the time or money to buy enough real estate properties to cover a wide enough range of locales or businesses to achieve proper diversification. Stocks allow you to develop a broad portfolio of firms and industries in a fraction of the time and cost of owning various assets. The simplest method is to invest in mutual funds, index funds, or exchange-traded funds. These funds invest in a wide range of firms, providing rapid diversification to fund holders.

  1. Stocks have fewer transaction fees. 

Even though you need to set up a brokerage account for purchasing and selling stocks, the price war among discount brokers has the trading cost diminished to effectively $0. Most brokers also offer a no-transaction-fee selection for mutual funds, index funds, and ETFs. 

  1. Stock investments can grow in retirement accounts with tax advantage. 

If you buy shares via employer-sponsored retirements accounts or an individual retirement account, your investment can grow with taxes deferred or even waivered. 

The Disadvantages

  1. Stock prices are more unpredictable. 

Compared to real estate, the prices of stocks are erratic. They can undoubtedly move higher or lower. This uncertainty can cause apprehension unless you are really in it for the ride because you want to have a good stock portfolio.

  1. The selling of stocks may come with a capital gains tax.

You may have to pay capital gains tax if you sell your investments. However, if you’ve owned the stock for more than a year, you might be eligible for a lower tax rate. Additionally, any stock dividends paid out by your portfolio during the year may be subject to taxation.

  1. Stocks may be a cause for emotional decision-making. 

While it is easier to acquire and sell stocks than real estate, this does not mean you should. When markets fluctuate, investors frequently sell, even though a buy-and-hold strategy typically yields higher returns. All investments, including stock portfolio creation, should be viewed in the long term.

The Verdict

Now that we have discussed the advantages and disadvantages of both types of investments, which would you prefer? It’s tough to make an apples-to-apples comparison of the two; however, it’s fair to say that real estate investments have just as much, if not more, return potential as stock investments. When you combine price appreciation, rental income potential, and the inherent tax benefits of real estate investing, there’s potential for impressive long-term returns.

An Alternative

If you are interested in going the real estate investment route but are not too keen on having a rental property business or flipping homes, one option is to invest in real estate investment trusts (REITs). 

REITs are real estate investment trusts that hold (and frequently run) income-producing properties such as apartments, warehouses, offices, shopping malls, and hotels. The most dependable REITs have a history of paying out significant, rising dividends. Many internet brokers provide publicly-traded REITs, REIT mutual funds, and REIT exchange-traded funds (ETFs).

The Pros and (Possible Cons) of Investing in Real Estate

Including real estate as an asset class in your investment portfolio diversifies it and lowers your overall risk. There are numerous real estate investing tactics that can be used to accomplish this. Real estate investment trusts (REITs), for example, are passive as dividend-paying equities. Others, such as investing in and holding rental properties for cash flow and capital appreciation, necessitate active participation and a considerable level of understanding.

It has been proven, though, that active investment in real estate surpasses other passive strategies. Moreover, you have to admit that having ownership and profit derived from actual properties gets your veins pumping compared to ownership of shares on paper. But as we are all about facts here, let’s discuss both sides of the coin. Here are the advantages and disadvantages of real estate investing

Advantages

  1. Real estate appreciates as time goes by. 

Over time, well-chosen real estate appreciates at a rate that often outpaces annual inflation. Yes, market corrections occur occasionally, and people may purchase the wrong type of property at a bad time. However, there is always the opportunity to acquire a good property at a low price, make modifications to enhance equity, and then sell for a profit. It’s the real-estate version of the stock market adage of “buy low, sell high.” 

Real estate, on the other hand, has always had intrinsic value. A stock can fall to zero, but a property is a tangible asset with worth derived from the raw land and the “improvements” made to it (the building structures attached to the ground).

  1. Real estate comes with unique tax benefits. 

Because of its unique tax benefits, real estate enables investors to build their wealth over time. How? For starters, rental income does not have self-employment tax. The government has tax benefits dedicated to real estate investors, including depreciation and lowered tax rates on long-term profits. 

Moreover, depending on your income and source of earnings, your rental property may give you tax deductions which you can employ against your other sources of income. The business of rental real estate involves a lot of expenses, like travel costs for property checking, and are tax-deductible expenses of business operations. 

  1. Real estate has constant cash flow. 

With rental properties, you can have a constant and reliable monthly flow of income.  Dubbed as “cash flow,” this refers to the money you have left after you have finished paying the bills. Once your property is all set up, you’ll have steady, passive income every month. As it is passive income, you have more free time to do things such as starting another line of business, investing even more in real estate, or simply spending quality time with your family.  

  1. Real estate enables leverage. 

You may use leverage to rapidly increase the value of your real estate holdings and accelerate your wealth-building efforts. The use of borrowed funds to purchase and raise the possible return on investment is leverage. Leverage is a strong advantage of real estate investing when used appropriately. You can buy an investment property with a 20% down payment using conventional financing rather than paying 100% with available cash. 

For example, with a $30,000 initial investment, you can get control of — and all the benefits of owning — an asset worth $150,000. With sufficient due diligence, you may use leverage to grow your wealth dramatically, especially in this low-interest-rate environment.

  1. Real estate establishes equity. 

Your tenants are practically buying the property for you when you use leverage wisely. Rental revenue helps you build equity by paying down your debt each month. Your tenant pays the mortgage payment when you acquire a rental property with a mortgage, boosting your net value each month. Consider it a savings account that grows without you having to deposit money each month.

  1. Real estate enables control from your end. 

With real estate, you have more control of success compared to other forms of investment. You are practically sitting at the seat of decision-making with the power for risk mitigation and portfolio growth. 

If you want to find deals, you can always hustle. If you find yourself with stiff competition, you can employ your strategies to ensure that tenants choose to go for your properties. You are holding the reins, and how good you will do would depend on your efforts. 

  1. Real estate acts as an inflation hedge.

Inflation is the economic phenomenon in which prices rise over time as the value of money falls. The annual rate of inflation varies. Inflation in the United States was 1.6 percent in the 12 months ending in June 2019. The rate of inflation in 2011 was 3.2 percent.

Many investments lose value as a result of inflation. If you made a 5.5 percent yearly gain on your stock portfolio last year, your actual profit was just 3.9 percent because your money’s purchasing power was depreciating due to inflation.

Real estate investments maintain pace with inflation. Rents and property prices rise in lockstep with the price of a loaf of bread. The monthly cost of a fixed-rate mortgage payment is the only thing that stays the same. As a result, your cost of ownership does not rise in tandem with your annual rental income. As the cost of living increases due to inflation, your cash flow improves because your largest expense – your mortgage payment – stays the same. In addition, inflation raises the property’s value. If you decide to sell in ten years, your properties likely will be valued much more than they are now.

Disadvantages

  1. Real estate needs money.

Of course, this is common sense. To make money, you need to spend money. As a first step, you need to pay the down payment, along with closing costs and another sum for repairs and updates of the property, so that you can rent it out for maximum income. Once the property is yours, other expenses, which have to be paid regularly, will follow – maintenance, insurance, property taxes, and mortgage dues. 

  1. Real estate requires time. 

You cannot learn how to run a real estate business overnight. You also need to invest time to understand even just the basics of managing and maintaining it; otherwise, you could end up losing money if you make a mistake. 

  1. Real estate is an investment that pays off in the long run. 

Real estate should always be purchased with a long-term plan in mind. You’re buying a tangible asset that you won’t be able to liquidate for cash if you need money quickly. Selling a property takes time, and the transaction expenses are higher than a stock sale.

  1. Real estate can be a source of problems. 

If you are renting properties, be mindful that tenants can be a cause of problems and loss of money and time, especially if you end up in a dispute in court. Examples of problematic tenants are those who don’t pay or take a long time to settle and those who leave your property in bad shape after moving out. 

  1. Real estate tax benefits don’t apply to all. 

Some tax benefits do not apply once you exceed certain income levels. Thus, before making any decision or acting on anything, make sure to book a consultation with a tax professional who has experience with real estate.  

  1. Real estate comes with unique risks. 

As with every other investment, real estate comes with risks, and these need to be understood and mitigated. Here are some of these risks: 

  • Purchasing the incorrect property at the wrong time.
  • Increased liability in the event of an accident on your property
  • Being stuck with a “professional renter” who knows how to take advantage of the legal system.
  • You are getting into a situation where you’re overextended. This is a trap that many real estate investors fall into. When investing in real estate, you must be able to make monthly payments on your debt despite market downturns, tenant issues, property vacancies, unanticipated repairs, maintenance fees, and other charges that come with the territory.

Buying and owning rental properties isn’t going to make you rich right away. Real estate can be an effective way to build money, but only if you use it correctly. You must master the skills of locating, evaluating, and purchasing good real estate deals. You’ll need to assemble a team of go-to contractors, bankers, property managers, and other experts that can deliver high-quality services at a fair cost.

As your rental portfolio grows, you can implement systems that reduce the need for your active engagement. Then, as a result of passive income, increasing equity due to debt paydown by your renters, and long-term capital appreciation, your wealth steadily grows.

The Importance of Diversifying your Investment Portfolio

What is diversification? It is the strategy of spreading your investments across different asset classes to minimize your exposure to any one type of asset. This method is intended to help you lower your portfolio’s volatility over time.

Learning to balance your comfort level with risk against your time horizon is one of the keys to effective investing. If you invest your retirement savings too conservatively at a young age, you risk your assets not growing at the same rate as inflation. Conversely, suppose you invest too aggressively as you get older. In that case, you risk leaving your funds vulnerable to market volatility, eroding the value of your assets at a time when you have fewer possibilities to recover your losses.

Diversifying your assets is one strategy to manage risk and reward in your investing portfolio. This strategy has a lot of different variations, but at its core is the simple principle of diversifying your portfolio across various asset classes. Diversification can assist in reducing the amount and intensity of stomach-churning ups and downs in your portfolio by minimizing risk and volatility; however, it does not guarantee a profit or protect you from losing money.

The Four Essential Components of a Diversified Portfolio

  1. Domestic Stocks

Stocks are an aggressive part of your portfolio, with the potential for more extensive long-term growth. However, this increased development potential comes with a higher risk, especially in the short term. Stocks are more volatile than other forms of investments, so your investment in one may be worthless if and when you decide to sell it.

  1. Bonds

Generally considered to be not as volatile as stocks, most bonds provide interest income regularly. They likewise soften the blow from the unstable ups and downs of the stock market as they don’t behave the way stocks do. 

Investors who consider safety more important than growth prefer US Treasury or other high-quality bonds while lessening stock exposure. Many bonds, especially high-quality issues, don’t give long-term returns as high as stocks. Therefore with these investments, you may have to accept lower long-term returns. However, some fixed income products, such as high-yield bonds and some international bonds, can provide significantly higher rates, though at a higher risk.

  1. Short-term investments

Money market funds and short-term CDs are examples of these (certificates of deposit). They are conservative investments that provide stability and simple access to your money, making them excellent for people who want to keep their money safe. They often offer lower returns than bond funds or individual bonds in exchange for that level of safety. Generally believed to be safer and more conservative than CDs,  money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC). Note that if you invest in CDs, you may forego the liquidity that money market funds provide.

  1. International Stocks

Non-US company stocks frequently outperform their US equivalents, giving investors access to opportunities not available in US shares. If you’re looking for assets with more significant potential returns but possibly more risk, try adding some international equities to your portfolio.

Additional Components of a Diversified Portfolio

  1. Sector Funds

Sector funds are concentrated on a specific section of the economy. They serve as essential tools that help investors looking for opportunities in different aspects of the economic cycle. 

  1. Commodity-focused funds

While commodities should only be invested in by the most experienced investors, including commodity-intensive equity funds in your portfolio—such as oil and gas, mining, and natural resources—can provide a strong inflation hedge.

  1. Real estate funds

These funds, real estate investment trusts (REITs), have a vital role in diversifying your portfolio while also protecting from inflation risk. 

  1. Asset allocation funds

Suppose you are an investor who doesn’t have the background or time to establish a diversified portfolio. In that case, you have the option to use asset allocation funds as your single-fund strategy, and mind you, it has been proven to be effective. 

Funds that are managed to a specific goal date, managed to preserve a specific asset allocation, managed to generate income, and managed in anticipation of particular outcomes, such as inflation, are examples of asset allocation funds.

Factoring Time into your Diversification Strategy

Most people equate their servings to goals such as a college fund, a retirement plan, a down payment, or even a vacation. However, if you are building and managing your asset allocation, you should consider two essential things, regardless of what goal it is you want to achieve. These are:

  • Time Horizon – the number of years before you expect to require the money.
  • Risk Tolerance – what your attitude towards risk is. 

Consider a long-term goal, such as retirement, which is 25 years away. Because your time horizon is so extensive, you might be ready to take on more risk in the pursuit of long-term growth, assuming that you’ll have enough time to recover lost ground if the market falls short-term. Higher exposure to domestic and overseas stocks may be appropriate in this instance.

However, this is where your risk tolerance comes into play. You should only take on an amount of risk that you are comfortable with, regardless of your time horizon. Even if you’re saving for a long-term goal, if you’re more risk-averse, a more balanced portfolio with some fixed income investments may be a better option. Even if you’re pursuing the most aggressive asset allocation models, you may want to consider integrating a fixed income component to lower your portfolio’s overall volatility, regardless of your time horizon or risk tolerance.

Another thing to keep in mind about your time horizon is that it is constantly shifting. So, if your retirement is now ten years rather than 25, you may want to reallocate your assets to lower your exposure to higher-risk investments in favor of more conservative ones, such as bond or money market funds. This can assist in reducing the impact of significant market swings on your portfolio, which is vital if you need money soon.

Once you’ve reached retirement age, you should invest a significant chunk of your portfolio in more stable, lower-risk investments that can generate income. Diversification is essential even in retirement to help you manage risk. Your most significant threat at this stage in your life is outliving your assets. If your time horizon is more than a year, it’s usually a good idea to avoid being 100% engaged in short-term investments, just as you shouldn’t be 100% invested in equities. After all, you’ll need some exposure to growth-oriented investments even in retirement to beat inflation and ensure your assets persist for what might be a decades-long retirement.

Regardless of your goal, time horizon, or risk tolerance, the basis for any intelligent investment strategy still has a diversified portfolio. 

The Right Investment Diversity Level

What is the right level of investment diversity? There is no correct answer to this because your level to diversify depends on your goals and risk tolerance. However, as a precaution, do remember that it is possible to over-diversify or spread your investments too thin.

When you constantly put in new investments to your portfolio or hold on to more than five different assets, the task of tracking and managing your money gets harder. Furthermore, this doesn’t help you achieve the goal of diversification, which is to better manage the risks you take to earn a reasonable return.

It might be difficult to objectively determine the “right” level of variety for you on your own, which is why working with a third-party professional can be beneficial. A trained investment advisor can assist you in financial planning by determining how much risk is appropriate for you and how diversified you need to be to achieve your long-term investment objectives.

Long Term versus Short Term Real Estate Investment

Among the dilemmas of an investor are deciding whether to get a long-term or short-term real estate investment. Both of these choices have their pros and cons, so understanding what these are can help you make the right decision. Let’s discuss each type of investment first, followed by its pros and cons. 

Short Term Investment

  1. Fix and flip

Based on its name, this mainly means you purchase a house below market price, renovate it and then sell it at a higher price for profit. If you can do this the right way, flipping houses can effectively make money in real estate. 

  1. Wholesaling real estate

This type of short-term investment doesn’t need the purchase or ownership of an investment property. All you have to do now is find a fantastic real estate deal and enter into a contract with the seller. You’ll then hunt for a willing buyer and sell the contract to them for a profit. Foreclosures and bank-owned properties are the ideal properties for wholesaling.

Pros:

  • Quick return on investment — When compared to holding onto an investment property for several years and relying on real estate appreciation, you can make a profit considerably sooner.
  • More considerable earnings — Compared to long-term investments, short-term real estate investments can yield a higher return on investment.
  • Personal growth – A short-term investment strategy necessitates a great deal of effort in a short period. As a result, you should expand your understanding of the local real estate market, construction, finance, and bargaining while completing the strategy. Working with real estate agents, attorneys, inspectors, insurance brokers, contractors, and attorneys will also help you develop your network.
  • No need for management – You won’t have to deal with renters or manage a rental property if you choose short-term investment tactics.

Cons:

  • High risk – There is the danger of losing a large amount of money, which is true to the fix and flip real estate strategy.  You can have capital gains taxes or expenses that were not anticipated while the renovation was ongoing. 
  • Holding costs – This disadvantage is unique to the fix and flip technique once again. It’s possible that the investment property will not sell as quickly as you had hoped. As a result, you may be responsible for loan repayments and maintenance fees, which will be paid out of your own money.
  • Stress – Let’s face it, the entire process of purchasing an investment property, renovating, and selling it quickly is stressful and can consume much of your time. 

Long Term Investment

  1. Buy and hold real estate

This type of investment involves you purchasing a property and holding on to it for a long duration. You have the option of renting out the property for several years or leaving it vacant and selling it for a higher price once it appreciates. 

  1. Renting out

This is when you purchase an investment property and have it rented out for a monthly payment. You have two benefits in such a method: appreciation and cash flow. 

Pros:

  • Passive investment – A purchase of just one to two long-term assets can pretty much seal the deal. Without putting in much time or effort, you can enjoy the positive cash flow and/or simply the appreciation.
  • Equity – Long-term investments provide you with the opportunity to create equity in your investment property over time.
  • Tax advantages – Expenses such as loan interest, insurance, legal fees, property taxes, repair charges, and even depreciation are tax-deductible when investing in rental properties.
  • Hedge against inflation – Increase your rental income (if you choose to rent out the property) and the value of your long-term investments as inflation rises.

Cons:

  • Tenant Woes – When renting out a property, bad tenants can damage your investment properties. 
  • Vacancy – With both of the standard long-term investment techniques, this can be a problem. Your property will always be vacant if you choose the buy and hold plan, and you will have to pay for upkeep out of your pocket. If you own a rental property, you may experience vacancies from time to time. This also implies you’ll have to pay for things out of your wallet.
  • Depreciation – Your property’s worth may depreciate over time due to events such as political upheaval or natural calamities.

So which is the better type of investment?

There is a road to success regardless of how you approach your real estate investment strategy. Just be sure you’re choosing the best plan for the property, and more importantly, the best method for you. What do you hope to achieve through real estate investing? Which strategy is best suited to your personality? You can begin investing and making money once you’ve answered these questions.

Investing in Multifamily Real Estate

Before discussing multifamily real estate in more detail, let’s first define what multifamily property means. 

Any residential property with more than one housing unit is referred to as a multifamily property. Multifamily properties include duplexes, townhomes, apartment complexes, and condominiums. Multifamily buildings offer excellent investment options for new investors. With some multifamily properties, known as owner-occupied properties, the owner chooses to live in one of their multifamily units. In whatever form you choose, investing in a multifamily property can be an effective way to generate wealth.

Kinds of Multifamily Investment Options

  1. Purchase a multifamily property. 

The most obvious way of investing in multifamily real estate is to buy a multifamily property. This can be a duplex, triplex, or even something more extensive. The point is to rent out the units so you can have income. Generally, two to four-unit multifamily properties fall under residential, while those with five or more units fall under the commercial estate label. 

  1. Join a crowdfunded real estate investment. 

Although this is a new kind of investment, it can bring you good returns. Here’s how it works in broad strokes: Let’s imagine a seasoned real estate investor wishes to spend $5 million on an older apartment complex. They want to spend $2 million renovating the flats and adding amenities before renting them out to make money. The developer plans to sell the property for $10 million after a five-year holding term.

They can only acquire a $4 million loan from the bank and only invest $1 million of their own money. So, to raise the remaining $2 million, the developer may publish the opportunity on a real estate crowdfunding portal and offer individual investors a piece of the action.

  1. Purchase a residential REIT.

This is the most straightforward and cost-effective method of real estate investment. REITs, or real estate investment trusts, are unique organizations that allow investors to put their money into real estate. Many REITs are publicly listed, which means you may purchase them through a broker with a single mouse click, just like any other stock.

REITs must pay out at least 90% of their taxable income as dividends to shareholders, making them great passive income investments, particularly in retirement accounts such as IRAs.

Benefits of Investing in Multifamily Real Estate

  1. Apartments provide steady cash flow.

Rental properties provide steady cash flow as rents are collected every month, and leases generally are yearly. Unlike the unpredictable stock market that only pays cash when the stock provides dividends, an apartment complex can provide consistent cash flow to an investor. That said, this is not an investment for a quick windfall. An investor should plan on having money invested in multifamily real estate for an average of five to seven years and expect to see an IRR of 15 to 20 percent on average.

  1. Can offer substantial tax benefits.

From a tax standpoint, real estate investing is unusual. There are several advantages to claiming real estate investor status as defined by the IRS. Investors, for example, enjoy unlimited mortgage interest deductions and depreciation accelerations, which might offset a portion of the cash flow gains. When utilized in conjunction with cost segregation, investing in multifamily properties provides the benefit of bonus depreciation. 

Finally, when selling an investment property, the IRS allows investors to use a 1031 exchange clause. Investors can then shift into another investment property and defer all taxed gains until later.

  1. Compile your portfolio in a day.

You may go from owning nothing to owning many houses in a day if you invest in multifamily real estate. Many rents can be collected rapidly, resulting in consistent cash flow. With all of your units in one location, you also save money on labor and per-unit costs. A small skilled on-site team manages them more efficiently, and team members can perform numerous responsibilities in some cases.

  1. Physical Resource

An apartment complex is a hard asset that you may invest in. You can see it, touch it, and supervise its upkeep and improvement. The value of the building, unlike a paper investment, will never go to zero. Apart from that, there will always be a demand for apartments. Not everyone can or wants to own a home and so they rent. Your investment will almost always increase if it is appropriately managed, sold, and maintained.

Tips for Investment in Multifamily Real Estate

  1. Find your 50%.

Calculating (roughly) how much a given multifamily property can profit you as an owner is the most remarkable technique to sift through potential deals. Calculate the difference between predicted income and expenses (rent payments, storage fees, parking fees) (repairs, maintenance, etc.)

You can apply the 50 percent guideline if you don’t have access to information on neighborhood comps. Take your predicted income and divide it in half; this is your estimated spending figure. Your net operating income is the difference between your projected monthly and estimated monthly expenses (NOI).  Remember the 50% figure is just a rule of thumb and should only be used as you start evaluating a property.

  1. Make a Cash Flow Calculation.

In this stage, you’ll calculate your estimated monthly cash flow, which will factor in your estimated mortgage payments. Subtract the monthly mortgage from the property’s NOI to determine how much money you’ll be putting in your pocket. This computation will give you an estimate of your cash flow. It will also assist you in determining whether the investment is worthwhile.

  1. Know your cap rate. 

The capitalization rate, or cap rate for short, is a third vital calculation to remember since it determines how quickly you will obtain a return on your investment. It’s critical to keep two things in mind. First, a “safe” investment, such as a certificate of deposit (CD), typically has a small cap rate of 1-2 percent. Second, the cap rate you’re about to calculate doesn’t consider many things. You should also think about property value growth, monthly NOI increases, and tax benefits for multifamily property owners.

To figure out the cap rate, multiply your monthly NOI by 12 to get the annual figure. Then divide that number by the current market value of the property. The first important thing to remember regarding cap rates is that they are not necessarily better. In general, a greater cap rate indicates higher risk and larger returns. A lower cap rate, on the other hand, denotes a lesser risk and lower return.

A decent rule of thumb is to aim for a cap rate of 5% to 10%. Any lower, and the investment may not be profitable enough. Anything more significant than that, and you’ll want to be sure you’re aware of all the risks involved.

The Rise of Instant Equity Investing

Perhaps you are now thinking of going the diversification route. Perhaps you are even entertaining the idea of real estate investing but are just not sure of where to start as the process of finding, evaluating and managing property can be daunting. 

Well, this is where we enter the picture. Presenting our group, Instant Equity Investing and the alternative solution that we offer. 

We’ve got over 20 years of experience in real estate and property investing starting from pursuit, evaluation, purchase and management, usually of middle size apartment buildings of 15-60 units. Currently, we have more than 500 units under management in the states of Tampa, Florida and Southwest Michigan. 

Why the focus on middle size apartments? Mainly because we are aware that it is at this building size where management gets to be quite difficult. It is larger than what would be dubbed as the “mom and pop” operation but also rather small for onsite management and to be considered as among the “big guys” category.

Through the years, we have excelled in this niche, working hand in hand with our sister company, Real Property Management Leaders which focuses on management of middle size apartment buildings for us and other property owners. 

It is through this focus on middle market properties that enabled us to obtain greater profits. 

The Investment Process

Our investment process involves four simple steps:

  1. Sign Up – Take the first step by clicking on the “Partner with Us” button and fill out the no obligation online form.
  2. Connect – Our connection starts with a phone call to break the ice. We get to know each other and you can ask us all your queries and concerns. If all goes well, we will enter you into our database of potential investors which gives a notification when there is an investment opportunity available. 
  3. Evaluate and Invest – Should a potential property be available, we will send you a business plan which discusses all property and investment details. We will attend to all inquiries you will have as well as confirm if such investment is right for you. If all systems go, we proceed to fund the purchase and close on the property. 
  4. Reap the Benefits – After closing, we will keep you updated with the progress and you will enjoy the benefits of cash flow distributions and regular reporting from our end.

As you can see, the entire process of partnering with us is easy, simple and direct. There are no complications involved for we always have your best interests at heart. In this partnership, our ultimate goal is for us, the real estate professionals that you are counting on, to produce instant equity for you.

Basically, this is what “Instant Equity” symbolizes in our company name.  

This article is really good but I think we need to take it one step further.  We never really talk about what we do which is where people can invest in private multifamily partnerships with the help of a professional like me.  I think we need to expand on this and talk about the benefits of this type of investing.  It’s kind of the essence of Instant Equity Investing.

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Reference Links: 

https://www.nerdwallet.com/article/investing/real-estate-vs-stocks-which-is-the-better-investment

https://www.millionacres.com/real-estate-investing/articles/real-estate-vs-stocks-which-has-better-historical-returns/

https://investorjunkie.com/real-estate/pros-and-cons/

https://www.fidelity.com/learning-center/investment-products/mutual-funds/diversification

https://www.synovus.com/personal/resource-center/investing/investing-101-the-importance-of-diversifying-your-portfolio

https://www.mashvisor.com/blog/short-term-vs-long-term-investments-real-estate/

https://thinkrealty.com/short-term-vs-long-term-real-estate-investment-strategies/

https://www.fortunebuilders.com/multifamily-investment-property/

https://www.millionacres.com/real-estate-investing/rental-properties/investing-multi-family-real-estate-3-different-ways-put-your-money-work/

 

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