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


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 $1M building at a 8% capitalization rate (very achievable). This leaves you with $80k net operating income ($1M 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 $1M 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 effects 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.


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.

  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 Philpott

      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).

  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.

  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 Olsen

    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.

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