Tax savings, the economy of scale, capital preservation, and leverage are all very important words to the wealthy. The wealthy, are diverse in their Investing. But there is a single asset class that provides the wealthy a secured and predictable way to build their wealth.
Through commercial real estate investing, the wealthy are able to use leverage to achieve an economy of scale that offers amazing tax savings, and capital preservation.
The wealthy see commercial real estate as essential to their investment portfolios. In fact, an examination of some of the most wealthy families on the Forbes 400 has commercial real estate in their portfolio. Some of the wealthiest people in today's society, such as Elon Musk, Jeff Bezos, and Mark Zuckerberg all made most of their money from Tech but also have a true appreciation for commercial real estate in their portfolio.
Why did I transition from single-family properties to commercial multifamily properties? The reason is simple. Single-family residential real estate is based on comps. The value is based on the house down the street. So, no matter how much I fix it up, no matter how much forced appreciation I think I was getting, my profits were actually limited by the other houses in the neighborhood. Investors have been bitten a number of times, but commercial real estate and that's multifamily apartments, Self Storage, mobile home parks, office, retail, etc. are based on a formula.
Commercial multifamily properties are properties that have five units and above. They are based on a value formula. When you learn this formula, you will thank your mama that she told you that you need to be good at math and this is your chance to apply that.
Value equals net operating income (NOI) divided by the rate of return or NOI divided by the capitalization rate. The capitalization rate is the rate of return that a cash investor would expect on an acquired asset at the time of purchase if she/he paid all cash.
In a buyer's market, we can see a Cap Rate of 10%+. That means that if you bought a $1m property you can expect $100,000 a year in cash flow, but the cap rate on that same property might be 5% in this seller's market. So as the cap rate compresses the value of the property increase. This same property in the same market different cycle may cost $2m to buy $100,000 in the annual income stream.
Now, the NOI divided by the cap rate gives you the value and there are so many exciting things we can do with that formula.
I want to point out here, my belief that the wealthy think like this. True wealth is assets that produce income. So while it's fun to invest in flip houses. It's fun to invest in Bitcoin, it's fun to do all kinds of things like that. I think the truly wealthy look for assets that produce income, and they get to a place where that income stream is more important than the appreciation though they love the appreciation as well. But the value formula says that you can for every dollar of increased income, you can get multiple dollars of value.
Do you know that famous guy Jeff Bezos? Yes, the tech giant. He took the light bulbs out of every vending machine in every Amazon facility from what I understand he didn't care about advertising lamps, snacks, or whatever. He cared more about the fact that that was costing electricity, and a light bulb and a maintenance person's time to change the light bulb, and he said look, every dollar I put to the bottom line is, whatever the price to earnings (PE) ratio is on that let's say $40 to the actual value of the stock but every dollar a month is $12 a year, multiply that times the PE ratio and you get a huge multiplier effect.
It's the same with commercial multifamily, that is, If you can increase your NOI, you can divide that by the cap rate, and you can get a huge outcome. Let's say you bought a 50-unit apartment building for $4.2m and 15 units are vacant at closing that has an NOI of $210K in a 5% cap market. If you can fill those15 units, you will actually increase the income to approximately $300K. This is estimating rents at $1,000 and expenses at 50%. Just by filling these 15 units, you would have added $90K to the NOI which equals a $1.8m increase in value.
If you buy that apartment complex for $4.2m and put 35% down ($1.470m) and you added $1.8m in equity increase, you just doubled the value of your equity, that's huge. That's how the wealthy build wealth using that simple value formula. If you can find a mismanaged asset, which is the key to a lot of this, you can grow your capital like the wealthy.
Over at H Squared Capital, we do just that. We build relationships with the best-in-class multifamily operators to identify these income-producing multifamily assets. We perform the underwriting, Due Diligence, and Some asset management and invest our capital alongside you who are wanting to be a passive investor. Let H Squared Capital do the hard work and also accept most of the associated risk while you invest passively and continue doing what you love.
Download your Operations Manual Here In the Operations Manual, you will learn how passive investors leverage Syndication to create Passive Income in order to grow their wealth for their future generation and create the ability to make an impact!
For more information on how you can get involved in a value-add multifamily syndication deal, please contact me at Hutch@HSquaredCapital.com or Dr. Heath Jones at Heath@HSquaredCapital.com. You can also visit our website at www.HSquaredCapital.com. We’d be happy to answer any of your questions and help get you started on the path to financial success through multifamily investing!
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