Multifamily, Investment Real Estate can be a powerful way to accomplish your investment goals. This type of investment can bring in income each and every month for as long as you own them. They can also protect your principal, not to mention, pay down your loans for you, shelter your income from taxes (legally), and even appreciate in value. Multifamily investments are a powerful financial instrument that can help you reach your financial goals.
Most investors know what they want to receive from an investment financially, but have no idea how to achieve it. They have no idea what size of property they need to acquire or what type of return they need to achieve on their equity investment to reach their investment goals.
In short, they don’t have a financial guide for achieving their goals through real estate investments. If this is you, it’s not your fault. It’s not an easy thing to figure out when you’re getting started and a lot of investors don’t like to share information with their potential competition. Unfortunately, this is an area most gurus fly right past as they would rather teach you the nuts and bolts of real estate. To me, that is like teaching someone how to build a car without showing them how to drive it. Don’t worry, I’m here to help. I believe that if you have your goal in mind, you will make better investment choices and reach your goals faster.
Let’s take a look at a real world example to help you start thinking about your financial goals and start putting together your plan for financial independence or retirement.
Let’s say that an individual needs $10,000 per month in order to quit his or her job and/or retire, and this same individual has 5 years to reach this goal. The individual in this example needs to answer two big questions to put together his financial guide to achieving his goals through multifamily real estate.
The first question: how much will they need to have to invest?
The second question: how big of a property will they need to buy to achieve their goals?
Let’s do the math!
To answer the first question, how much will you need to invest, we need to take a look at potential returns on your investment and how much you want to make. The formula is pretty simple. You need to take your potential return on investment (as a percentage) divided by the amount you want to make on an annual basis.
Your return on the amount of money you invest can definitely vary widely from investment to investment. However, historically we’ve found that a return of 5%-10% on your investment is very achievable in about any market if you invest conservatively and don’t take on unnecessary risky.
Let’s take another look at your goal of $10,000 per month or $120,000 per year in income. Now if you were able to achieve a 5% return on your equity invested, you would need to invest approximately $2.4 Million (120,000/.05). Not a small chunk of change. However, if you were able to achieve a 10% return on your equity invested, it would cut that number in half to only $1.2 Million (120,000/.1). Now it’s still a big number that might be an intimidating challenge if you only have 5 years to reach your goals. However, the longer the time-frame you have to achieve your goals, the easier this is to reach.
To answer the second question we need to find out how big of a property (or how many apartment units) we will need to own to reach the goal of $10,000 in income per month. A simple rule of thumb I use to determine how many apartment units I need to own to make a certain amount of income per month is this: For me to purchase a multifamily property, I need to make at least $100 per unit per month in income after paying all expenses. Now this is just a rule of thumb and doesn’t take into account a lot of factors, but has worked for me over and over again.
If you look at each apartment unit you own as $100 in income per month to get to $10,000 per month, you would need 100 apartment units total over five years. We get that by taking the desired income ($10,000) and dividing it by the income per unit per month ($100). That may seem like a lot when you’re just getting started, but it is very achievable with persistence and patience. There are some of you that will be able to go out and buy one complex with 100 units to meet your goals, where others will build up their portfolio when they get started.
What does this mean? If the investor buys a total of 20 units each year for 5 years and each of those units, after all expenses are paid, is producing $100 in passive/ spendable income per month, the investor will be receiving a total of $10,000 a month before even adding in appreciation and the loan pay-down that is occurring. Not bad for acquiring just 20 units a year over 5 years!
The best part is, you don’t have to fly across the nation to do it either. There are those properties in your own back yard all across the country.
You can plug your own monthly needs and timeline into the example to come up with your magic number. Keep in mind, you don’t have to do it all by yourself, you can attain similar results by partnering with others who are purchasing multifamily properties. If you would like help in achieving these results, please contact our team and we’d be happy to help you put together a customizable plan to help you reach your financial investment goals.