How Active Management in Apartment Investing Can Grow Your Wealth
With Percy Nikora, Co-Founder
Real estate is one of those rare asset classes where you can- it generates operating income, especially if you buy things like multifamily, or hotels, or office. So, it's generating income; at the same time - if you are doing the right things, you're buying in the right markets, to the right kind of deals - it's also appreciating. So, you're getting ... The value's increasing in two ways. You get the ongoing cash flow, as well as the appreciation of the property.
It's also an asset class that you can influence the appreciation. What I mean by that is the one big difference between single family and multifamily is single family, the value of the property is really based on the comps in that area or what the neighborhood value is. If you happen to buy an expensive property in a particular neighborhood, doesn't mean that property is going to continue to appreciate the same way forever. You may actually lose money there; versus in multifamily, you can influence the value of that property by focusing on the net operating income. The way multifamily properties are valued, it's based on the net operating income. If a property next door has a higher net operating income, it's going to be worth a lot more than your property.
We can increase the net operating income, so we have a direct control over that, or direct influence over that, through either making enhancements to the property, or bringing in some efficiencies in the operating model, and just increasing the bottom line. When you increase the bottom line, the value that it adds is exponential. The way the multifamily properties are valued, it's based on something called a cap rate. You take the NOI and you divide it by the cap rate; for every dollar that you increase the net operating income, you could be adding anywhere from $10 to $20 in value. That's a huge differentiator. That's definitely a plus in that asset class.
Then, again, from a tax standpoint, there's a number of strategies, but it allows you to take some deductions that allow you to shelter the taxes that you're getting for that particular period in time, and there are things like 1031 exchanges that allow you to defer that even further. So, you can compound the returns that you get in real estate, which, again, are unique to this asset class that I haven't seen anywhere else. That's really why we like real estate.
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