Professionals looking to invest in real estate often have one goal in mind: financial stability. Though a simple goal, new investors need to know their hard-earned money will create a nice return. To determine how a property will grow on the real estate market, advisors calculate the return on investment. So, how exactly does a return on investment work? Let’s look at the different types of return on investment available for multifamily investors.
What is a Return on Investment?
Return on investment (ROI) is a calculation method that helps determine an investment’s monetary value. Through this equation, real estate investors can compare the value of different properties to predict which assets will become the most profitable over time. For those investing in multifamily properties, this ROI percentage is a great tool to help advisors find the best property investments for investors and assure clients about their asset selections.
Calculating a return on investment follows the following equation:
ROI = (Investment Growth − Investment Cost) ÷ Investment Cost
Yet, this calculation doesn’t account for potential risks or holding time on a property. Since multifamily properties are relatively safe and hold their value over the long term, they are regarded as quite secure investments. However, other factors such as maintenance costs or loans may affect an investor’s total return on investment.
Types of Return on Investment
Cash returns are a type of return on investment which calculates the income real estate investors receive from an investment. Through cash ROI, real estate investors and financial advisors can estimate the potential returns a property investment will yield This is particularly valuable knowledge for advisors to select the best properties and reassure investors of the return value these assets will provide to their diversified financial portfolio. However, these cash returns only represent the cash perspective of return on investment, meaning whatever real estate property fees may affect the total passive income received from the investment.
Appreciation is a type of return on investment that shows how a property’s value grows over time. Increases often occur during a seller’s market, wherein competition between buyers increases due to the few properties available on the market. For multifamily real estate investors, appreciation is a great chance to build their return on investment for long-term profitability. At times when the real estate market raises property value—such as during high inflation—appreciation soars, giving investors the greatest chance at high returns whenever advisors choose to sell.
Principal Paydowns are a unique type of return on investment that allows investors to use rent from multifamily property tenants to help pay off the mortgage. Instead of going straight to the investment’s growth, principal paydown ROI allows investors to build their return by paying off any withstanding loans first. Since the principal paydown method allows investors to use rental payments from tenants, this enables the return on investment to grow long-term without cutting into the investor’s wealth in the process.
Real estate investors looking to invest in multifamily properties have the chance to receive tax-benefits on their return on investment. One tax benefit multifamily investors use is deducting required property expenses to offset rental income. Since multifamily properties are mostly rental units for apartments or offices, these expenses are tax-deductible, giving investors a greater return on investment. Some common expenses that real estate investors can deduct include mortgage insurance, property taxes, maintenance repairs, or other professional services used to manage the building.
Depreciation is another tax benefit included in a return on investment. Contrary to appreciation, depreciation allows investors to lower a property’s value by reporting wear and tear developed over time. Under IRS regulations, this asset depreciation turns into “paper losses.” which investors may classify on taxes as dropping value even if the property value grows on the real estate market. In turn, an investment firm can front load said multifamily property deductions to investors through cost segregation studies that show all depreciated property costs and take advantage of the time the asset reaches a good value.
Multifamily investors looking into different types of return investment can choose from CAPT: Cash, Appreciation, Principal Paydown, and Tax advantages. Though each investment return has a different purpose, each works to give investors the greatest return value. When the time comes to select your return options, count on Apta Properties’ experts to guide your portfolio toward wealth and prosperity as we have with other professionals. Start your investment journey by contacting Apta Properties today.