As the baby boomers gather into retirement, a significant portion doesn’t have savings to carry them through their elder years. Many will rely on investments that provide a safe but paltry income of 3-5%, or a risky but enticing income of 10-15%. The bottom line is: to get a decent return on your investment, you sacrifice safety. There is a very attractive alternative: the multi-family investment.
If a senior has $50,000 in a 401K or IRA, or mutual fund, the best pre-tax annual income to be expected is 10% to 15% return on investment. A well-vetted multi-family investment (and safe) can easily bring in a 12% return, after tax! How is this possible, you say? There are three reasons: 1) The depreciation deduction – (1/39th of the purchase price can be deducted from the taxable income every year for 39 years), 2) The use of lending to leverage the cash invested, and 3) The Interest Deduction – in our investment example the purchase was leveraged with a mortgage of 65%, the interest of which can also be deducted from taxable income.
Using these tools, the investment would generate an after-tax 12% return on investment. So, a $50,000 investment in a multi-family could expect a return of $6,000 per year, again after-tax, versus $3,562 after tax with a high-risk stock or bond. There’s simply no comparison, especially since the right multi-family will be just about the safest investment there is, and recession-proof.
Then, why isn’t everyone doing this? Well, there are a couple of reasons. First, investment advisors do not wade into these waters because they are not qualified to do so, except to recommend real estate investment trusts, which is a good way to participate as an investor. Second, the barrier to entry into this investment is the down payment, in this case, $50,000. To do it right, you should put down no less than 30%, and 35% is preferable to minimize your risk against market downturns. The Great Recession saw a 20% downturn, the biggest drop in 80 years. If you had an investment with a 65% loan, you would have survived the worst recession in three generations. Other commercial properties went vacant during this time, but multi-families fared well, owing to the fact that everyone always needs a place to live. Having a 65% loan-to-value (LTV) means you will have the flexibility to lower rents as needed to keep the units occupied, without jeopardizing your ability to pay the mortgage.
But, if you’ve got the cash in paper assets, what are you waiting for? You simply can’t find a lower risk, higher return investment – anywhere!