Why the Wealthy Put Their Money Into Multifamily & Commercial Real Estate

by | BiggerPockets.com

Have you heard stats such as “80% of millionaires attribute their wealth to real estate”? Or heard stories of living the good life off passive cash flow from rental property? Combine this with the recent years of unpredictable, disappointing stock markets, and you get masses of people realizing they have no control over many of their investments and therefore their life savings. Tired of blindly following the crowd of 401K stuffers, many have started looking at why so many wealthy people own real estate. In this article, I will break down the numbers in the simple yet rarely talked about truths behind the wealth building abilities real estate carries.

Who doesn’t love to focus on the wealth and freedom real estate can give you? We all love it so much, we forget to explain how it does this. This void in education leads people jumping in not realizing that even some investment strategies within real estate do not carry the benefits of others.

Going to meet ups, listening to podcasts, or reading articles, you frequently hear about people building wealth and the successes they have accomplished through owning investment real estate. What we forget to ask is why and how owning investment real estate is able to make this happen so much better than other investment strategies, including flipping, stocks, private lending, and any other form of investing. In this article, I will answer that very question.


Why I Focus on Multifamily

When it comes to real estate investments, I focus in multifamily apartment complexes because of the control it provides in determining the investments results. Some of the most powerful factors in real estate are control, debt (leverage), and taxes. For the average investor, leverage is commonly used in real estate, but not in stocks or private lending. In addition, the IRS and owners of investment rental property might as well be best friends because the IRS has made so many rules to benefit us.

Related: New Study: Ability to Delay Gratification Predicts Wealth, Health & Success

There is a lot of useful information packed into this article. You will have to read this article slowly and maybe even a few times. If you don’t know a term, stop and look it up. Stop to understand the math. Even though there is a lot of math, it’s only addition, subtraction, multiplication, and division. I actually wrote this article on my iPhone using the iPhone calculator, so don’t let the math overwhelm you. Once you truly understand all of the words and math behind it, you will see how simple it really is to build wealth in real estate and why our wealthy continue to attribute their financial freedom to real estate.

The best way to illustrate the truth is through math and examples. Rather than look at the same old surface results, we are going to drill way down into why all these millionaires attribute their wealth to real estate—and specifically multifamily and other commercial real estate investments.

Today, You’re Buying an Apartment!

You put a $200K down payment on a $1MM building at a 8% capitalization rate (very achievable). This leaves you with $80K net operating income ($1MM x .08). When you borrowed the $800K from the bank, they lent it to you at 4% interest with a 30-year amortization. This means your year one mortgage payments equal $45,832 ($31,744 interest, $14,088 principal), leaving you with $34,168 in cash flow ($80,000-$45,832) or a pre-tax cash on cash return of 17%.

But wait, there’s more!

So if you cash flowed $34,168, do you pay tax on $34,168? NO! Another beauty of real estate and leverage is the depreciation tax benefit. This is one the benefit the IRS has given to their buddies who are real estate investors. Even though you only put 20% of the $1MM into the property, you get ALL of the depreciation benefits.

Apartment buildings are depreciated over 27.5 years, which means you get to depreciate the building’s value. The building’s value does not equal the property value because the building sits on land, and that land also has value. The IRS does not allow you to depreciate the land. A typical percentage of a property value that is allocate to land value is 20%, or in this example, it would be $200K. This leaves you with $800K of building value to be depreciated, so $800K/27.5 = $29,090.

What does this mean? It means you barely pay any tax on that $34,168 cash flow you made on the building. You actually only have a taxable gain of $19,166 ($34,168 cash flow + $14,088 principal portion of your mortgage payment – $29,090 depreciation). We add back the principal amount of your mortgage payment because it is not a tax deductible expense and subtract out the deprecation we listed above.

Since you were able to put $200K down on a property, I’ll assume you’re doing pretty well financially. Because of this, I’ll even venture to guess you’re in a 35% tax bracket. Since your tax bracket is 35%, the taxable gain of $19,166 would result in cutting a check for $6,708 to the IRS, leaving you with $27,460 ($34,168 – $6,708). This means your after tax return is 13.7%.

This is where most people shut off the brain and say, “My financial advisor says I can earn 8% in a mutual fund, and those have no tenants, no managing the property manager, no headaches. That peace of mind in itself is worth not owning real estate, right?” NO, not true at all! There are more major pieces to this puzzle that the wealthy use that so many that give up at this step never see.


Related: One Simple Habit the Vast Majority of Wealthy People Practice Every Single Day

How to Use Taxes to Your Benefit

Let me jump back to the taxes, specifically depreciation. Another tool our buddies at the IRS gave real estate investors was a cost segregation study. They found out we like depreciation, and so they gave us more!

In accountant talk: A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. In normal person language, this means the IRS lets you accelerate deprecation on things like cabinets, appliances, carpet, light fixtures, and other parts of the building. This forces more tax savings to the investor sooner.

Rather than try to break down all the different parts of the cost segregation and their deprecation rates, I’ll just give a round number of what a cost segregation study would do for you and this example. You really don’t have to know the nitty gritty on how to do them because you will hire a professional to do it for you.

For our example, doing a cost segregation study would increase the total depreciation allowance by $10K. Nice! This means we can adjust the above math to now look like this ($34,168 cash flow + $14,088 principal portion of your mortgage payment – $39,090 depreciation). So now our taxable gain was only $9,166, which also reduces the amount we have to pay the tax man to $3,208 ($9,166 x 0.35). Even though you put $34,168 into your pocket, the first year you only paid $3,208 in tax. This means you, Mr. 35% Tax Bracket, only had to pay a 9% tax rate on your income! I told you the IRS and real estate investors are buddies, so their always trying to find a way to help us out! Because of this, your after-tax cash-on-cash return is 15.4% ($30,960/$200K).

You’re thinking, “Hmm, 15.4%. Maybe this kids on to something.” We’re just getting started. Read on.

The Power of Debt

A huge difference between other investment classes and owning investment real estate is the power of debt. With most debt comes amortization. Wealth is built in the amortization of the debt you put on the property. Back to our example, the $800K in debt you put on the building will have an army of tenants paying down your mortgage month after month. This is amortization.

Now let’s wrap the amortization into our example. Using the loan terms I mentioned, the first year of the loan will result in a $14K reduction in the amount you owe. If the property value stays the same, that can also be seen as a $14K increase in equity. If we add that $14K to the after-tax cash flow, we are left with an all-inclusive after-tax return of 22.4%.

In this example, we assume the value of the property will not go up in value one cent — which is smart because assuming is another word for speculating, and speculating is risky investing. However, in multifamily (5+ units) or other commercial investment real estate, the value of the property is based on the income the property produces. The wealthy love to control things—this is exactly why the wealthy focus on commercial property such as multifamily apartment complexes.

Being that you control the income and expenses in a property, you also control the value. What this means is if you have a way to increase income either by raising rents, billing residents back for utilities, or adding any other source of ancillary income to the operations of the property, you will also add value. Also, the flip side of the equation is if you decrease expenses by renegotiating operating expense costs, billing residents back for utilities, reducing turnovers and vacancy, putting in energy efficient light bulbs and plumbing fixtures, or ANY other way to cut operating expenses, you increase the value of your property.

Increasing Multifamily Value

So let’s look at our example one last time. Say this $1M building was a 20-unit apartment complex. The reason you bought this complex was because you’re smart and you saw opportunity in it—the opportunity to add value by both increasing income and decreasing expenses. Nothing major, just a few things you could do right after purchasing to help the bottom line.

Before purchasing, you noticed that the previous owner had owned the building so long, they had not been keeping up with market rents. You noticed similar units in your area rent for $900-925, but yours were only renting for $850. Being that all the residents were on month to month leases, you went ahead and implemented a minor $25 a month increase in rents to all units in month one. You wanted to keep rent below market so you wouldn’t lose your residents but thought that was still fair to everyone. This added $5,700 (20 units x $25 x 12 months – 5% vacancy allowance) of income to your bottom line annually.

Another opportunity you wisely saw was in vendor costs. Over the past 20 years, the vendors had slowly crept prices up above market rates for their services. The previous owner was comfortable with the properties operations and had a good relationship with his vendors so they never bothered to check the going market price.

Day one of owning the property, you were able to negotiate the following monthly expenses down:

  • Monthly dumpster fee from $110 to $95—an annual savings of $180
  • Per cut grass cut expense from $150 to $100—an annual savings of $1000
  • Property management fee of 8% down to 7%—an annual savings of $1,600

This all doesn’t seem like much, and was really simple to do. Let’s see how it affects the returns in our example.


After increasing income $5,700 a year and simultaneously decreasing expenses $2,780 you were able to increase the money you put in your pocket $8,480. The extra cash is nice, but the real power behind this is the fact that commercial real estate is valued based off the income it produces. Since you increased the income the properties produces, you also increased its value.

Let’s look at how this affected our example. Your property still is in the same market and asset class that awards it with the same capitalization rate of 8% that you bought it for. Now that you have found ways to add $8,480 to the net operating income, this gives you a total net operating income of $88,480. By dividing the net operating income by the cap rate, we can find the new value of the property.

$88,480/.08 = $1,106,000

That’s right! Making those minor changes increased the value of your property $106K.

Your mortgage didn’t change, so you still owe the same — you simply raised the equity you have in the building $106K without putting a single dollar more into the investment.

New & Improved Totals

To find what the all inclusive return is now that you have added value, add $8,480 you your taxable income, which will result in an additional $2,968 due to the tax man. This takes your new and improved total after tax cash flow to $36,472—or an after tax cash on cash return of 18.2% Add in your total $120k equity accrued in year one ($14K from amortization and $106k from forced appreciation), and you have an all inclusive return of 78% (($36,472 + $120K)/$200K).

Now that you found a way to make all this money, you may be thinking the taxes will hit hard once you sell the property. My first response is, “Why sell it?” This is a fantastic property. Hold on to this cash cow, milk it, pull all the equity out in a cash out refinance, which is not a taxable event, put it in a trust, and hand it off to your heirs.

Or if you love the velocity of money and are looking for the biggest bang for your buck, sell it. But do so in a 1031 exchange, which defers all tax into the next property purchase. Do this until you die, and the taxes die along with you.

And that is how the wealth is built in real estate.

We’re republishing this article to help out our newer readers.

Do you agree with this assessment? Why or why not?

Let me know your thoughts with a comment!


About Author

Jered Sturm

Jered Sturm is co-founder and director of sales and marketing at SNS Capital Group. Jered began in the real estate industry in 2006, working for a successful real estate investment company as a handyman. From 2009-2012, Jered co-founded the construction company Sturm Properties. Using his background in contracting and construction, he began investing in “Value Add” real estate. Now, after co-founding SNS Capital Group, Jered has conducted over 10 million dollars in real estate transactions. He currently co-owns and operates a portfolio worth over 3.7 million dollars in investment real estate.


    • Is 4% APR realistic? I would assume higher? It always bothered me people tried to use number to make their points, but the number may not be realistic at the time the article is written, or it required advance skills and connections to get to those numbers.

      If real estate is so good, why not use realistic number that an investor with average or even below average skills can achieve?

      You really don’t want the reader taking your advise after reading this article and has a rude awakening upon entering a deal. That would be irresponsible.

      I would highly advise to take this sort of article with a huge grain of salt if not real life example.

        • Doug Johnson

          Frankly, a $1M first apartment is small one. I have a number of friends who bought >$4M as their first property. My first deal was >$8M, but I did it with a team of 4 persons.
          There are a couple of important thing to consider;

          1.) Training and mentoring are the key to success. Books and friends are great, but a mentor is required to do it right.

          2.) Syndication is powerful tool to consolidate OPM (Other People’s Money) to do a deal together. On our $8M deal, we had 35 passive investors who were happy to provide equity and get double-digit cash flow and double their money in <5 years with no effort.

          3.) Multifamily is a team-sport. Having great brokers, lenders, property mgmt and legal make it successful.

      • Anthony Rosa

        I like the article but these numbers are realistic only in some markets. In Manhattan, NYC you will not get anything commercial for 2 million dollars. You need Lots of cash! As far as negotiating sanitation costs, don’t bother because it is what it is period. Property management won’t budge with costs either. They are all in competition for your business, they know each other and keep pricing the same. When one goes up they all go up.

  1. Your numbers work pretty well (and they actually describe my market except that $1MIL will get you a SFR, not a multifamily), except for the reducing expenses part. In my experience, the waste management company is NOT going to negotiate down their standard garbage fees for whatever service you choose, property managers are not going to budge from their 10% (wherever did you get 8%), and I wouldn’t want to reduce the grass cutting fee because I know the guy who actually cuts the grass may be making less then minimum wage already (you think not? think again). I hope you have some other more practical examples of how to save money.

    • Mike Dymski

      I have a property just like Jared describes. We replaced the waste management company upon acquisition…saved $110/mo. I pay 3rd party management 8% and no other fees. Can actually get 7% in this market. We also changed landscaping vendors and saved $105/mo. Our landscaper is great, fun to deal with and appreciative of the business as we are of his service. You will have to look for other articles on all cost saving opportunities as this article just provided some examples and was intended to help readers understand the potential returns on commercial real estate, not a cost save article.

    • Jered Sturm

      Thanks for voicing your thoughts Katie.
      $1M for a SFR is a pricy market for sure! But the concepts are all the same regardless if the building is $100M or $1M. The great thing about RE and a free market is you don’t have to buy in “your market”.

      Thats a bummer you have not been able to negotiate anything. In my own experience I have done all three of the items I listed in the article and many others. Actually the waste management was simplest. We have who major vendors in the area that supply dumpsters. I called them both and said “whats your best # you can do to provide this service” Then I the sent the lowest quote to the higher company and asked “here is where your competitor is can you beat this? ” That went back and forth 4-5 times and the bill was reduced by 30% just like that. Again another beauty of the free market.

      I have seen property management from 3% to 15% depending on asset class/type and unit count. To think this or any other cost are not negotiable is not the case in my experience.

      As for the grass cutting: In the example I did not say the prices were slashed to obscenely low rates. In the example we simple adjusted back to market rates. No one forces landscapers to be landscapers and no one can force someone to agree to cut the grass. Those who are in the business of cutting grass are happy to be paid market rate to do so.

      Im glad you asked about additional methods of cost savings/ income generation. Here is a link to a forum where in the second post I list more: https://www.biggerpockets.com/forums/52/topics/337073-adding-value-to-a-distressed-multi-unit

      Lastly to be clear this article is an example. Although I have implemented very similar strategies it is an example to help others understand the simplicity of building wealth is commercial RE. Its not for everyone, and thats all right too.

      Best of luck!

    • Adi P.

      I pay a decent property manager in Boston 5% (which is a lower than the going rate of 7-10% in the area, but that is his choice) – it depends on where you are. Yard mantenance companies here make from $25 – $45/hr and I do not live in an expensive area. I have a friend who owns a landscaping company which is where I got that figure. Private property – esp. commercial properties often use private waste management compnaies so may be able to find one cheaper (as Mike says below).

    • Daniel Hughes

      Stop saying “I can’t.” and start saying “How can I?”

      You say that the waste management company will not negotiate down their standard garbage fees, so then find a different company that has better rates or is more open to negotiation. Same with property management. Exhaust all options instead of just giving up.

      • Katie Rogers

        Who is giving up? Not me. You need to understand that different people live in different markets. I am just telling you the difficulties of the situation. There is only ONE waste management company in my market. Personally, I do not use property managers. I don’t like their one-sided contracts. I’d rather do it myself. A stunning set of unfounded assumptions you made there.

    • Actually you are wrong Katie. I have a Property Management company and I do have clients that only pay 7% property management fees on multi-family units. An owner with a SF dwelling will pay 10% prop. management, but not an investor with 20+ units. I know other management companies that charge as low as 6%, if you have over 100 + units. As Jered pointed out, everything is negotiable. The successful real estate investors knows how to negotiate contracts and services, thus building wealth.

      • Katie Rogers

        The article is all about what $1M will buy.

        1) You are probably not in my market.
        2) I said that in my market, $1M get you an SF. You do confirm that property management is 10%. “Will pay” you say, pretty much shutting down negotiation.
        3) In my market, if your are an investor with the wherewithal to have 20 units or 100 units, you are offered a quantity discount. You don’t have to negotiate for it.

        • I am in Hawaii, and the avg priced investment property that I manage is $1.5 million. Not sure what market you are in, I wish we got 10% on the properties that we manage. I only have 2 clients (ea. with a $450K condo, that pay 10%), everyone else pays 8 or 7%. It’s very competitive here in Hi, because there are so many management companies.

    • Charlie DeHart

      About a month ago, we negotiated our monthly trash from $781/mo to $563/mo. This is very achievable and there are even companies who have business models around doing this for you. Couldn’t name one off the top of my head, but they do exist. A few other sometimes overlooked examples of cutting expenses in multi-fam could be:
      * Fighting tax assessments (done so successfully a number of times)
      * Audit the variance used to pass through water/sewer to ensure it is correct as it almost never is (especially with an owner who has owned for 10+ years)
      * Look for energy savings with common area lighting and heating/cooling
      * Virtually anything provided by a vendor, including lawn care and common area maintenance

    • Hi Katie:

      Sorry, but you are dead wrong. I have been in property management for 15+ years, and I wish I got 10% property management fees! Where do you live? I live in Hawaii (very expensive), and most of my property management fees are 8%, but I do charge 5 to 7% to my clients that have multiple properties (over 10). It is rare to get 10% property management fees, because the rents in Hi are extremely high, and property managers are very competitive.

      • You said, “It is rare to get 10% property management fees, because the rents in Hi are extremely high, and property managers are very competitive.” Well there you go. Your experience in high-rent Hawaii does not in any way invalidate my general point. According to you, even 10% in Hawaii is not unheard of, “An owner with a SF dwelling will pay 10% prop. management.”

  2. Kim Martin

    Jered – fantastic post! I totally agree. It is hard work, but I love it. I can’t imagine building my wealth any other way. When I ask mentors if they have any regrets, they all say, “I wish I never would have sold”. So with that in mind, I hold, and pass down to my heirs. That is called legacy wealth. I hope to keep going, one property at a time.

      • Jered, how old were you when you started investing in real estate? Excellent article, you touch upon all the basics of investing in multi-family units. I am trying to get my son interested in investing in real estate, since he will inherit a good sum of money in the near future (a quarter of a million dollars). Not enough to invest in muti’s in CA, but maybe possible to invest in other states. Any suggestions what states have desirable and affordable multi-family units?

  3. Hi Jered, Thank you for the article! My lender has told me that I have to put down 25% on a multi-family property. They’ve also quoted me an interest rate of 4.8%. Another lender offered me a 30 yr fixed, at 4.25% if I buy one point cost of the investment property purchase. Do you have any ideas on why there is such a discrepancy between these numbers and yours (20% down payment and 4.0% interest)? Are there any cities in which you suggest investing? Thank you!

    • Jered Sturm

      Thanks for the question Rachel.

      There is no right way. Some people buy cash, some people leverage 100% of the costs. Some put 15 year variable rates and others do 30 year fixed. It all comes down to you, and what you are trying to accomplish by investing.

      Financing terms are very negotiable on commercial RE especially with smaller lenders. You will see loans all over the board on rates, and terms. This just means one lender may have more of an appetite for this type of lending over another so they become more aggressive in their lending to attract borrowers.
      Here is a good recent forum discussion on the types of lending people are getting.

      Again this is up to you, where you live, what investment goals you have for yourself. We currently focus in the Atlanta GA and surrounding markets, and Cincinnati OH and surrounding markets .

      Best of luck on your investing!

  4. Greg Fry

    Hi Jered. 22.4% is a pretty impressive annual rate of return, especially if it is sustainable over the life of loan. I agree that an 8% rate of return in a 401k is meager in comparison. Supposedly one can get closer to 12% by using small cap value index funds, but this is still much less. Another factor is you don’t have access to most of that money before retirement. Having access to investment gains before retirement makes RE investing attractive.

    I’m not a RE investor yet, but I really enjoyed your article. I’m very interested in multi-family once I raise enough cash. Do you think future interest rate increases will significantly impact ROI for RE?

    • Jered Sturm

      Hey Greg, Thanks for commenting.

      I do think interest rates will play a role in all investments, multifamily RE included. Understanding debt and pairing the right debt strategy with each asset’s business plan is vital to success. If you put a short variable rate debt on a property with a 15 year exit strategy you assume too much risk in the debt variance, unless you negotiate in caps on the adjustments that are sustainable within the investment. there are thousands of options is all about matching the best options up to find the balance of minimizing risk and maximizing returns.

  5. Vince Greenland

    I agree with a lot of the points in this article and have found similar experiences on several deals. We have been able to increase income and decrease expenses to increase value on properties. This has enabled us to build additional equity and leverage it to other properties. This technique has enabled us to grow very quickly.

    We were able to use the tool to own properties free and clear by combining mortgages. I.e. a few properties had accumulated $200k plus in additional equity. We then remortgaged numerous properties into one mortgage and only held a few in the mortgage. This then freed up 3-4 properties that were owned free and clear. We have done this several times with the intent on trying to free up properties.

    We then used the “freed up” properties as collateral to purchase new ones. We did this 2 years ago to purchase a 96 unit complex that was completely mismanaged. The owners had owned the property for decades and most likely were now controlled by the children of the original developers and were absentee to say the least. The property had a vacancy rate of 19% when we took over. we did a lot of due diligence before we took over and knew that the rents below market and the units, once fixed up would be above average. We purchased the property for $2.35 million and used 4 “freed up” properties as collateral and put none of our own money into the deal.

    The original purchase was in May of 2014. In July of 2015, after 6 months of the property being completely full, we had the property appraised at $3.5 million. The bank then released the rest of the properties and we were ready for the next one.

    We are still tweaking things to maximize the income and expenses on the property. The latest “tweak” was taking over the management of the laundry service. We invested about $27k to purchase new equipment. We were originally getting approximately $12k/year(50 %) from the split from the management company before we took over. After about 3 months it looks like we will be getting about $28k/year from the laundry. We raised prices and were probably getting ripped off a little from the management company to account for the difference. So that is a $16k/year increase.

    We have been successful with a lot of the techniques and approach outlined in the article.

  6. Mike Flavin

    I think this article does a good job of laying out the basics of a successful real estate investment. I would rather put a large portion of my assets into one real estate investment I truly understand than I do investing in a mutual fund full of stocks I have no real expertise in. It is great to see how many BP Members have had success and are enthusiastic about their investments.

    That being said it is important to note that the risk profile of a real estate investment is completely different than traditional investments. I think it is important to discuss concentration of risk, the importance of cash reserves and quality market research when examining if real estate is for you.

    I will use a relatively small $400,000 investment for the purposes of discussion. using a 4% rate with a 30 year amort and 20% down payment the monthly mortgage is around $1,750 in addition to insurance, taxes and maintenance costs.

    Concentration of Risk
    Most lenders will require a new investor to personally guarantee their first loan in addition to the down payment. In the event that the deal goes sour and there is a default on the loan the lender is on the hook for the entire $400,000. An investor must understand and be comfortable with committing this amount of capital to one investment.

    Cash Reserves
    Unexpected expenses and periods of vacancy are inevitable in real-estate. The best way to ensure you make it through these periods without a default is to have cash reserves large enough to get through rough times. I personally think investors should have enough cash on hand to pay for 6 months of investment expenses without making changes in your lifestyle. In my example this would be around $15,000. An investor must be willing and able to fund reserves to an adequate level.

    Market Research
    The best way to fail in real estate is to invest in a market in which you do not understand. Comparative sales and rent rates can be very easily manipulated by a bad real estate agent looking to make a sale. School district borders, surrounding developments and proximity to noisy heavy traffic areas all have an effect on sale price and pending developments can increase property values in both directions. An investor should be confident in his/her knowledge of the area before making any real estate investment.

    Successful real estate investing requires a significant amount of time, capital and risk and anyone considering real estate should be prepared to confront this reality. That being said, real estate investing provides opportunities to find undervalued properties and can lead to an accumulation of wealth that far exceeds that of traditional investing.

  7. Justin Sumulong

    Great article Jered! I think the detailed/numbers are really helpful in painting the pictures. People need to understand that most, if not all, deals are a bit different from other but it’s understanding the concepts that really help for me. Thanks for this!

  8. Could you explain your final comment about not owing any taxes? Wouldn’t the original basis still be in affect for your heirs or the trust that now holds it? (if they were to ever sell)

    • Jered Sturm

      Sorry Earl, My wording could have been better there. What I was intending was no tax on the cash out refinance if you choose that route. Or you could defer taxes till death through 1031 at which time they go away and do not carry over in your estate. You are correct though if you put it in a trust and they sell, yes they will owe tax. But again why would they? they could refi as well and I’m pretty sure they can also 1031. Thats about as far as my knowledge takes me on this topic. a good CPA or estate attorney may be able to dig into exact specifics.

      Either someone has to die, or someone has to pay those taxes! haha.

    • John Clauson

      Hi Earl, plenty of tax advantages to be found.

      Taking a windfall from a cash-out refinance is a non-taxable event but it does count against the owner’s capital account. Upon death, the late owner’s capital account is erased and the heir(s) inherit the property with a stepped up basis, meaning their basis in the property is the current market value. Also, to the best of my knowledge, the heirs get to depreciate the property all over again starting from their new basis.

  9. willia zuluaga on

    In the chapter “How to Use Taxes to Your Benefit” perhaps by unintentional mistake you take $ 39,090 of depreciation of $ 29,090 undersides.

    Great Article.

  10. Gordon Cuffe

    great detailed article. The only bummer about deducting losses against income with rental properties is when your taxable income is above 225k. My cpa says that you have to carry forward the losses until the income is lower or you sell a property. I could be off a little bit in that 225k income amount.
    It is also great to own properties within your IRA or roth IRA or any self directed retirement account.

    • Jered Sturm

      Thanks for commenting Gordon. You may want to explore this further. Everyone’s tax picture is different but your logic here may be incomplete. I will assume you are talking about passive losses offsetting active income. An alternative which I use and many of the wealthy investors use is the IRS designation of the real estate professional. With this designation, you can use all your losses.
      Again to each is their own, but I am not a fan of holding real estate in a retirement account. In most cases, if performed right there is little taxable income generated from these investments so the question would be what are you sheltering it in your retirement account for. all this does is add a bunch of rules and restrictions.
      If nothing else I hope this is food for thought.
      disclosure: I am not a CPA and this is not advice

  11. Justin Cabral

    Awesome read! Thanks for writing.

    What would you say to the financial advisor that feels everything is overpriced today and that investing in one asset class is not a good financial plan.

    Some of the other feedback I have heard from financial planners is how real estate has still not fully recovered from 2008 vs S&P 500 which has doubled since 2008, how commercial real estate loans are typically variable rates with balloon payments unless you purchase a fixed rate which can be expensive, how cap rates for commercial RE are at an all time low, and how managing vacancies involves increased risk I may not be comfortable with.

    In January I began investing a portion of my cash reserves in a managed diversified portfolio (liquid) that has done pretty well (up about 15% now) and has been up every month.

    Now I am talking with my financial advisor about bumping up the amount in that portfolio and investing my other cash reserves in longer term (not liquid) assets (notes and bonds) where I can hedge my risk (with buffers and something else I forgot the name of).

    It’s a little uncomfortable for me because I don’t understand it well.

    What are your thoughts about these types of investments managed by financial advisors as well as the philosphy of not just investing ones cash reserves in real estate (one asset class)?

    • Jered Sturm

      I may be the wrong person to ask. I am heavily weighted in RE. I like it because I understand it well as well as control the investment. I agree markets are hot. What that means for full time investors like me is sourcing leads just becomes more work. As long as we remain disciplined and stay creative on lead generation there are deals in all phases of the cycles.

  12. Nathan J.

    If you manage to find a good condition apartment building at an 8% cap, and with rent’s lower than the market, and vendor expenses higher than they should be…..well that’s a fantastic deal!
    I was seeing cap rates for apartment buildings being compressed significantly lower than 8% (5-6% range in philly for non warzones and decent condition buildings), and running expenses getting higher each year. It seems there is a lot of foreign money coming in right now looking for some yield with safety.
    For that reason, I ended up going back to SFH where I was seeing much higher cap rates (10%).
    I do agree though to get scale and build up that passive cashflow quickly, then multifamilies would be great. Though, for me, those cap rates were getting shrunk too low right now.

  13. Kimberly Ashkenazi

    Great article!! I highly recommend “Tax Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes”. For anyone that has read this book (@Jered?), would you consider Tom Wheelwright’s tax recommendations aggressive? My CPA seemed to think so! Also, another friend is critical of depreciation because you have to recapitalize it at the sale of a property. Thoughts?

    • Jered Sturm

      Our company uses provision as our CPA firm. This is Tom Wheelwrights business. You actually are required to take depreciation. You can avoid the recapture through 1031 exchanges or by not selling.
      Thanks for commenting!

      • Congrats on your due diligence of the MF investment.

        IRS Pub 527 states that…

        “If you did not claim all the depreciation you were entitled to deduct, you
        must still reduce your basis in the property by the full amount of depreciation that you could have deducted.”

        Although we’d all wonder about one’s choice not to claim depreciation given clear recapture code, where in the IRC did you find that one is actually “required” to depreciate?

        Also, one is not allowed to claim depreciation if real property is held less than one year – per IRS.

        • Jered Sturm

          I am no CPA or Tax Expert. I do hire the best CPA’s and that what they told me. If I read the IRC looking for specific words I wouldn’t have time to run our business so I hire the Pros and trust their knowledge.

          Whether the word “required” is in there or not I think we both agree not taking depreciation is poor business practice since you will end up paying for it if you took it or not.

          Good point on the one year. But this article if focused on buy and hold and not flipping. I see this as just another reason to buy and hold and not flip.

  14. Eric O.

    Hey Jared,
    Great article but the example you laid out it seemed to be missing expenses on the building when calculating the various returns, unless I just missed it. You broke out the NOI at the Cap Rate of 8% of the purchase price of $1M then subtracted out financing but where are management, maintenance, grounds keeping, CAPEX, etc. factored in? And again, I may have just missed it in the numbers, just trying to clear it up! Thanks,


    • Jered Sturm

      No problem Eric thanks for asking. I think the disconnect is in what NOI is. NOI = gross income – operating expenses. So all the expenses you mentioned are already subtracted to get to the NOI.

      I hope that clear it up!

  15. Peter Mckernan

    Hey Jered,

    This was a great topic and really touched on the key examples of how to increase the property value without trying to increase vacancies or increase expenses. Those are keys that people do not think about especially when just starting to look at those cost saving measures.

  16. Gloria Almendares on

    Fantastic article Jared. I have been an investor during the past 25 years. My best investments have been four-plexes. You don’t have to put 25% down, that is for anything over 5 units. I did exactly what you mentioned in your article. I renovated one unit at a time (they were 4 units, 3+2 each), got rid of M-T-M tenants, renovated the units and increased the rents from $900/mo for ea. unit to $1,500/mo per unit. I purchased the fourplex for $440K, and sold it for $810K, 2 years later. By increasing the cap rate, I was able to almost double the value of the building. I also installed solar panels and decreased my energy costs. I live in Hi and these multis are very difficult to find now.

    • Jered Sturm

      Great story Gloria. Congrats on the huge gain in just 2 years. Another great option for those reading these comments would have been to refinance and pull a lot of that equity out tax free. That would have put a good check in your pocket and you still would own that property. None the less great accomplishment. Thank you for sharing and commenting.

      • gloria almendares on

        That would have been ideal Jered, however, I had a 50% partner, who wanted to cash out. I was not in a position to buy him out.

        P.S. I also want to complement you for being so responsive to all the reader’s comments. Most authors at BP will only reply to a few.

  17. Chinedu Michael Onuoha

    I am new at REI and I have recently read a lot of articles on BP. This is definitely one of the best articles out there. It’s explanation is really clear with regards to how to invest big in real estate and how wealth is actually created by the wealthy from RE. I can’t thank the author and comments enough.

    I just bought, my first 2plex. About to buy a second one in two weeks and a third property – 3plex by year end to get into REI. Am doing cash purchases. If I had read this article first, or I had a mentor like you, I may have considered using all my funds to partner/jump into an apartment with a 20% downpayment as my first REI.

    Thanks once again. After this article, I feel like a pro.

    Please also share one of the apartments you invested in and lost money, so we understand some of the mistakes you made and therefore we should avoid. I know it can’t be all rosy..

  18. Hi Jared,
    Reading your posts and all the comments has me both inspired and intimidated. I’m new to REI; my portfolio includes a few SFHs managed by a property manager. I want to move to the multi-family market but I’m afraid to lose my shirt in a bad deal. Where do I get the information and education to learn the financial part of being a great REI so as to make sound decisions? REIAs are full of people trying to sell me something or take advantage of my ignorance.

  19. Don Spafford

    Love this article! I’m also new to Investing and my goal is to get into multi-families for all of the reasons mentioned. But I also know I don’t have the capital for a 20% down payment. I’ve heard of strategies to get it for less though. Say you take the same $1m building but can negotiate down to $900k. Saves $100k overall, right. But your out-of-pocket downpayment bottom line isn’t much smaller (200k vs 180k). So instead, you have the negotiated price of $900k, but in the contract arrange that you will still buy for $1mill, but the seller will give you $100k in credits for deferred maintenance, rents, etc. and use that credit toward the down payment. Now you only need $100k for the down payment. At this point, I still don’t have the $100k, but it is possible to find an investor to front that and in return they receive a monthly percentage from rents, maintenance, or whatever.
    I have only heard of this strategy that somebody has used, but have any of you out there been able to accomplish something along those lines that would be willing to coach and help an eager new investor get into this area and receive something in return? I currently have available in my market a couple great opportunities one for about 1.2 mill and another for over 4 mill.

    • Jered Sturm

      Don, Creativity is equal to if not more powerful than cash. HOWEVER, it comes with responsibility. many get over creative and put themselves in dangerous investments that are teetering on the edge of default right from the start. One slight adjustment to the market and down it goes. This is not to say it can’t be done. It can be but make sure you know what you’re doing before you ask anyone for their hard earned money and put it at risk in your investments.

  20. Daniel Hughes

    Great article! I will be bookmarking this…

    I had a question though.

    “You actually only have a taxable gain of $19,166 ($34,168 cash flow + $14,088 principal portion of your mortgage payment – $29,090 depreciation). We add back the principal amount of your mortgage payment because it is not a tax deductible expense and subtract out the deprecation we listed above.”

    I don’t quite understand why you add the $14,088 principal portion of your mortgage payment. Could you explain this further? Is it because as you’re paying down the principal of the mortgage, that’s becoming equity in the property?

    • Jered Sturm

      Your thinking is correct. The clarification you are looking for is that in the quote you mentioned I am referring to taxable income, not cash flow. The IRS says you can expense the interest but not the principle because as you said the principle is becoming your equity.

      Hope that helps!

  21. M.I. Seka

    Good article to give a good idea but you neglected the expenses of such a building. Once that factors in, it’ll eat up most of your profits and turn this deal into a loser. Just going on mortgage as your only expense is too simple.

    • Jered Sturm

      The clarification you are looking for is that in the quote you mentioned I am referring to taxable income, not cash flow. The IRS says you can expense the interest but not the principle because the principle portion is becoming your equity.

  22. Adriel Hsu

    I’ve already been set on the idea of multi-families even before this post.

    Now the question is:

    1) How to get the $200k

    2) Where to find such a deal in my market.

    I’m a new investor. Done 1 BRRRR deal and am about to undertake another. I realized I won’t be able to achieve my goal of $4000 a month cash-flow and passive enough setup where I can live in a different country permanently through SFR rentals.

    I have very little capital (a couple grand).

    The city in where I’m investing has said that no more new apartment complexes can be built within city limits. There aren’t that many apartments in the area, and I’d say there are 3-4 big players that own the majority of them.

    Should I start at duplexes-4plexes instead of SFR? or Should I flip SFRs until I have enough capital to get into multi-families and forgo BRRRR Singles altogether?

    I’m in a very strong rental market, but the people in my area (southeast texas) all want to rent homes and not apartments. A lot of temporary workers come by due to the industry around the area.

    The city in where I’m investing has said that no more new apartment complexes can be built within city limits. There aren’t that many apartments in the area, and I’d say there are 3-4 big players that own the majority of them.

    It’s not a big city, so I’ve considered marketing and doing my real estate in Houston, but I don’t know the area too well.

    Any tips on raising the capital and breaking into the multi-family industry Jered or others? I mean I can always syndicate but that would cut down the cash flow and I would need multiple multi-family complexes, when it’s hard enough to get 1



    • Jered Sturm

      Adriel Thank you for your comments and questions. You are ambitious and that is a great thing. However, I can to answer many of your questions and either can anyone else other than you. The answer to most of your questions are “what do you want to do”. Pay attention to the forces of the market. If there aren’t many apartments in your market and everyone wants to rent homes than I’d have to ask why would you want to invest in apartments there? I can tell you whats right for you but I can share a part of my own story and hope it can help you find your own.

      I invest in Cincinnati Ohio This is where I was born and raised, started my business built my portfolio and it gives me great cash flow in the midwest markets BUT the potential for appreciation is far less likely than other markets due to net migration being stagnant. So I as we grew I wanted to expand into a new market that would give a more likely chance of appreciation over the long haul. After researching we decided Atlanta. So we would continue to operate in Cincinnati and add Atlanta. To do this I packed up my things and moved to Atlanta so that I could be in the market and make it work. Moral of the story, Do what you gotta do to make it work.

      My last comment is to the part of your post where you say “Any tips on raising the capital and breaking into the multi-family industry Jered or others? I mean I can always syndicate but that would cut down the cash flow” I will put a huge word of caution on this. Raising money can be very profitable and a great way to run a business but the responsibility that it carries is massive. And I strongly encourage you to learn with your own capital before you ever involve other peoples hard earned money. We did over $10M in real estate with our own capital before we opened up to syndication. The way I view capital is this: To many, it may just be dollars in some person’s bank account but to me, those dollars represent the hours and often years of that person’s life that they traded to earn that money. So if you want to raise money be prepare to take on the responsibility that it really carries.

      • Haskell F.

        I think it’s easy to say “learn with your own money” when you have $10 million in liquid assets but if he only has a couple of thousand on hand, then he will need to find other means until he has the positive cash flow to fund his own purchases. I am sure that there are plenty of people who started out with nothing and now have a great portfolio. Yes, there is risk but there is risk in any new business. Likewise, I am sure he understands the responsibilities that are required in dealing with investor funds, but you have to start somewhere.
        I am also interested in hearing about recommendations for those with very little personal funds and who wish to enter the buy and hold market… especially in today’s market which has significantly changed compared to those who started 5-10+ years ago.
        Do you have any words of wisdom for those looking to start this year with little to no funds?

  23. Bill Bell

    Nice article! QQ, for the not so wealthy in terms of the $200k cash down, are there strategies for raising that type of capital? I have heard of fundrise which sounds like this approach where a crowd sourced method is used to get lower level investors into commercial real estate. Any thoughts/experience in this type of approach to join the game? Perhaps could be context for future article?!

  24. Wesley Emison

    Great Article but I have 2 comments. Disclosure, I didn’t read through all of the comments but I would add that you shouldn’t say that the cost segregation study increases the depreciation by $10K without discussing further. That statement alone may lead a reader to assume that depreciation is permanently increased by getting the study performed which is not the truth. It only accelerates the depreciation meaning that in later years you will have less depreciation to offset income. I agree the cost segregation study is an amazing tool to use, and I have used it as well…but I just didn’t want the readers to be misled into thinking that they will always have a tax savings equal to year 1. The savings are greatest in the first 5 years then begin to decrease. I should note the savings are even better if you perform a renovation on any of the units because you can write off a portion of your original investment that the experts an allocate to the pieces of property that you ripped out and replaced.

    Also, in your year 1 cash on cash return discussion you ignored the cost to the experts to perform the segregation study. On a 20 unit complex in my part of the country, East Tennessee, this year 1 expense could easily be $18,000. One good thing is that the cost of the study is deductible in the year it is performed, so that helps. So, after tax cost (at 35%) in year 1 would be $11,700 to reduce from your after tax year 1 cash on cash return above.

  25. eric c.


    Really appreciate you writing this post. I currently have a few individual units and know there are more benefits to owning these rentals, just never sat down to figure it out. Your post really helps me realize this and also commits me to looking at a multifamily property rather than one of units.


    • Stewart VanValkenburg

      Hey Ann, basically he is saying keep this apartment complex. You get money each month from rent and you can get a good portion of the increased value of the complex out by refinancing it. Since he increased the value by 106k if he refinances at 80% LTV he can get about 85k of that 106k. There aren’t taxes for pulling money out through refinancing. Does that answer your question?

  26. Eric Chang

    Can people clarify the cities they invest in? I can get barely 2% CAP rate in bay area (northern cal). I agree with Jered that 8% CAP rate is a no brainer given today’s interest rate, but where are these market?

  27. Monte M.

    I own a successful small business but have always been interested in real estate. I just bought my 2nd duplex and it already seems like it’s going to be a great investment. Articles like this have inspired me to spend more time learning about real estate and building wealth long term. As a small business owner, I have no pension or promise of future money. I need assets that produce income long term. I want to thank you for writing this article because it was one of the many puzzle pieces that helped me decide to get involved in apartment buildings. Thanks!

  28. Maggie Vineyard

    This is an excellent article about multifamily investing. As a bank analyst, I have seen my clients use all of the above strategies very successfully and yes 4% were possible less than a year ago.
    Buying a million dollar home in an expensive market, is completely different. Unless your goal is strictly appreciation, not a very wise investment.

  29. Stefan Cox

    thanks for your sharing and I want to know how do you know exactly what the value after you repair and renovated the property? and how do you know the monthly income before you buy it, which means how to define what the price can I rent it out and the price of the house after I repair it, cause if you have the wrong number the results will be different.?

  30. James Mast

    So if I am reading this correctly your ROI is solely based on Income-mortgage. Shouldn’t you also figure in your maintenance expenses and any other expenses you incur? If I missed that part please forgive me and point it out to my attention. Thank you!

    • Jared: I skimmed the comments but do not see in your original example anything about including the cost of insurance and property tax. I just bought a commercial propety for $800K, and put $200K down with mortgage payments of $4572 and after procuring 6 commercial leases on the property my revenue is $12K/month leaving $7428K in monthly profit. But I also must add in $1625/month for tax/insurance and I don’t see where in your example you consider that. Not being critical, but just want to know if you took that into account in your example. You do not explicitly mention that but for me without that my cap rate is 11%. But when tax/ins is considered and it must be paid obviously it reduces cap to 8.55%, a pretty big difference. Of course, I do all the things you mention, i.e., putting capital improvements of $50K into it and all tenants pay their share of utilities plus 15% and since I office on the property and manage it myself my own utilities are paid for.

      So, this is where my CPA comes in. We will not make money the first year due to paying for the improvements, but in one year when all is paid for I will reap the benefits of a property that is now worth $850K and depreciating that over 20 years will increase my equity by some 8%. So I know I am on the right track, but I just don’t see in your example why you did not mention this important and necessary expense.

  31. John Ball

    Hi, was just curious to understand how you calculated the yearly principal and interest breakdown of ” ($31,744 interest, $14,088 principal)”. It seems as if you are applying that 70% of the payments are applied to interest and 30% to principal but I formulated the numbers in excel to verify the math and they didn’t match up. When I used an Interest and Principal repayment calculator, the numbers were slightly less than yours at $32,000 (I) and $13,828 (P) for the year. Could someone briefly explain?

    • Jesse Petrillo

      @John Ball, the principal and interest breakdown changes monthly based on the loan’s amortization schedule. Use a mortgage calculator that shows the monthly amortization (such as this one: https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx) to calculate the payment based on $800K at 4.0% for 360 months. Then, look at the amortization schedule to see how the payment is split between principal and interest for each payment. Add up the interest (or principal) for the first 12 payments from that amortization schedule and it will match the “year one” numbers that Jered used in this article.

      Hope this helps!

  32. Henry Harwood

    Hello, I just signed up to BP tonight and this is the first article I read. This is a good, easy to digest, example that opened my mind to another good reason to invest in MFs, “pull all the equity out in a cash out refinance, which is not a taxable event, put it in a trust, and hand it off to your heirs.”?

    While reading this article, my mind immediately began thinking of more ways to cut expenses. Is there an ideal way to manage the mortgage in regards to taxable gain as the principle rises each month? For example, would it be beneficial to pull equity early to reduce your taxable gains from the principle portion of your mortgage payment while also freeing up funds for more investments? If so, is there an ideal time to do this? ?

  33. Rachel Luoto

    Thank you for such a succinct breakdown Jered! Under contract on my first apartment, this article will definitely help me explain to the people in my life why I go to the trouble. BP needs more in-depth articles like this, to keep the momentum as investors move from newbie to casual to professional.

  34. Alejandro Munoz

    Wow! Such Great information. The ROI in this hypothetical deal really shows the power of real estate. Thank you for sharing this article. What would you suggest to someone who is looking into multi family investing to start off doing?

  35. Katie Rogers

    “You actually only have a taxable gain of $19,166 ($34,168 cash flow + $14,088 principal portion of your mortgage payment – $29,090 depreciation). We add back the principal amount of your mortgage payment because it is not a tax deductible expense and subtract out the deprecation we listed above.”

    When you prepare your tax return, you do not add the principal amount of mortgage payment to the income. Yes, the principal is not a tax deductible expense. The proceeds of a loan are also not taxable income to the borrower. So in your example, the taxable income is much less, only $5078. Maybe this source can clarify https://www.accountingcoach.com/blog/principal-payment-financial-statement

    “The principal amount received from the bank is not part of a company’s revenues and therefore will not be reported on the company’s income statement. Similarly, any repayment of the principal amount will not be an expense and therefore will not be reported on the income statement. ”

    However, if you are the seller, any principal that the buyer pays you, either directly or passed through the buyer’s lender is taxable income from which the cost basis can be subtracted.

    Consult also IRS Publication 527 Residential Rental Property https://www.irs.gov/pub/irs-pdf/p527.pdf

    Any article that extols depreciation should also mention that if the property is sold, all the deducted depreciation must be recaptured because presumably you got it back in the proceeds of the sale.

  36. Erik Orozco

    I truly enjoy your articles and value you provide to the site Jered! I recently heard Ramit Sethi on the money podcast discussing how stocks beat out real estate over set period of time. I’m not too sure, it seems just about any niche in real estate can provide a double digit return if done right!

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