Owning a multi-family property is one of the smartest investments an individual can make. For many taxpayers, owning a multi-family home can be an excellent investment.
What is a passive multifamily investment?
A passive multifamily investment is one in which the investor does not participate in the day-to-day management of the property. The investor may be a limited partner, or LP, who receives annual reports and pays rent to the general partner his or her share of returns.
The GP is responsible for day-to-day operations of the property and is responsible for collecting rent from tenants and paying expenses.
Passive investors do not want to manage their properties on a daily basis. They generally want to earn a steady stream of income with low risk and little hassle.
A passive multifamily investment is often a good choice for investors who are looking for an investment that requires little time or effort on their part but still provides them with a solid return on their money
What are the benefits of passive multifamily investment?
Passively investing in multifamily properties has several benefits over actively managing them yourself or through an outside property management company. The following are some of the most important tax benefits:
Lower Barriers To Entry: One of the biggest barriers to entry for most real estate investors is that they have to manage their own properties, but with passive investing, you simply get an apartment and let someone else take care of it for you. This means that it takes less time and money to get started compared to other methods such as flipping houses or managing your own property management company.
Relative Stability: The multifamily market has been relatively stable, even in the face of economic and political uncertainty. Although there is always the potential for a downturn, the long-term trend is upward. This makes investing in multifamily property an attractive option for passive income investors.
Depreciation: Multifamily properties are depreciable assets, which means you can deduct a portion of the cost from your taxes each year. The IRS allows you to depreciate real estate based on its useful life, which varies depending on the type of building. For example, an apartment building with 50 units could be depreciated over 27 years according to IRS guidelines. This means that if you bought an apartment building for $2 million and it generates $100,000 in income per year, then $27,000 would be deducted from your taxable income each year for 27 years.
The two main ways passive investors share in the depreciation
- Straight-line Depreciation: This is the most common method of depreciation for multifamily properties. It allows investors to deduct a set amount of money from their income on their taxes each year until the property is fully depreciated. At that point, they can no longer write off any additional expenses.
- Declining Balance Depreciation: With this method, you can write off a portion of your property’s cost each year. You’ll also be able to deduct a portion of the property’s expenses, like mortgage interest and property taxes, as well as any capital improvements you make to the property.
IRA Deduction – Investors can make contributions to their Individual Retirement Account (IRA) and deduct the amount from their taxable income. If you have made contributions up until this point, then you may be eligible for a partial deduction on your taxes. This is because IRAs offer a tax deduction on up to $5,500 per year for those who aren’t covered by their employer’s retirement plan and up to $6,500 per year if you are covered by your employer’s plan.
Tax Efficiency: Multifamily properties are usually held as real estate investment trusts (REITs). This means that when you sell your properties, you pay no capital gains tax on the sale proceeds. You also avoid all the hassle of tracking depreciation and amortizing it over time. The property manager takes care of all that for you. As such, you can have more money available for reinvestment in other investments or passive income streams such as rental income from other properties or even your own house!
Diversification – Diversification is one of the most important aspects of investing. Having multiple properties in different locations reduces the risk associated with any single property or market segment. This increases your ability to withstand downturns in any particular market or asset class while continuing to benefit from a strong overall economy and rising values across all types of real estate.
Passive investing is a great source of capital to have at your disposal. The investors that use this method understand that their return is generated by the asset–the building, not the property management provider. While passive investing is definitely the way to go, it has the potential to take the multifamily industry in a new direction.
New to multifamily investments? Download this free guide to learn more about multifamily real estate syndications and how to use them to accelerate your retirement, create generational wealth and enjoy tax breaks