Building Super Wealth Through Apartment Investing
Most of my life I have studied how the wealthy have amassed tremendous fortunes. I saw how many wealthy families — the railroad titans, oil barons, steel magnates, farmers, ranchers, car dealers and real estate moguls had accumulated real estate over time while earning income in the process.
For thirty years now I have been investing in real estate. My first purchase was a $78,000 house and I realized it was a mistake after just six months. I was dependent upon one tenant and when they moved out I had to make the payments. I quickly dumped my mistake and my next investment was a thirty-eight unit apartment complex that gave me a positive surplus cash flow every month.
Since then I have been involved in over 3/4 of a billion dollars in transactions, successfully survived the worst real estate correction since 1920 without losing any money, (the 2008 collapse) and currently have income producing assets valued in excess of $500,000,000.
Investing in apartments is a brilliant wealth builder because it accomplishes 5 monster wealth multipliers.
1) Positive Cash Flow. When a property is purchased and managed correctly and when you use the right kind of leverage, it will produce cash in excess of expenses, capital investments, and debt leaving the investor with a positive cash flow. Gross rents less all expenses equals your net income — subtract the debt along with all long-term repairs, and that equals your cash flow. I look for properties to produce a minimum of a 5% return before considering any opportunities that may exist at the property, such as raising the rent, reducing expenses or mismanagement.
2) Tax benefits. The IRS allows you to write off the building (apartments) over twenty-seven years, providing the investor the ability to reduce the taxes owed on the positive cash flow (ordinary income) by depreciating the buildings and equipment sitting on the land.
The depreciation expense is not available on REITs (real estate investment trusts) as you are not actually investing in real estate but stocks, thus not provided with the same benefits. Owning “real” real estate can allow you to earn a positive cash flow in the first year and use depreciation to reduce your tax burden to zero. Certain repairs, capital expenditures (appliances, roofs, windows, plumbing, etc.), can be deducted as depreciation reducing your tax bill on income.
You can also defer taxes with income-producing real estate. In the United States, the IRS provides real estate investors with an almost unbelievable option of deferring taxes on gains from 100% of their profits if they simply roll into future deals. This is called the 1031-exchange allowing you to use the entire amount that you bought a deal with to buy into a bigger deal and build greater wealth faster. This is how you get super rich.
3) Appreciation. Pick the right property in the right location, in a market that will continue to be strong into the future and you are almost guaranteed appreciation. We do tremendous research on markets and focus on the sunbelt and cities where there is organic population growth and infrastructure support.
While the investor waits for time to lift rents, (rents determine the ultimate value of the property) the property’s value increases and this is called “appreciation.” Real estate as a whole has historically increased in value in the USA, even in markets that are dying. Income producing real estate, especially apartments, increase in value either because you physically improve the property, increase the rents, or reduce the expenses (or all of the above). I was once told that apartments in Florida double in value every ten years as long as you pick the right year.
4) Debt Pay-down. While many people believe all debt is bad debt, in reality, debt is the landlord’s friend when he doesn’t abuse it. When we purchase a property at CardoneCapital we always use a mortgage. Depending on the property we will borrow 50–80% of the purchase price and use the property’s income to pay the debt off.
This means, over time, the tenants are essentially paying the debt down, allowing our investors to build wealth automatically.
This is the same concept as your dad or financial planner suggested for you with regards to your home being paid off over thirty years. The difference is you aren’t paying it off, someone else is and you earned cash flow every month.
To make this concept clearer, pretend for a moment you bought an apartment complex for $1,000,000 with a mortgage for $800,000. Your $200,000 earns 10% a year after all expenses, earning you $20,000 a year in positive cash flow. And let’s assume the property doesn’t appreciate over the next thirty years (almost impossible).
In the year 2047 you will own the property free and clear for which you put $200,000 down and earned 100% of your money back in the first ten years. It’s worth a million dollars and you paid nothing!
5) The Future Value of Money Multipliers. Most people don’t fully understand the real wealth creator of time and this is how you build super wealth. The rents between now and 2047 will go up and that is what ultimately determines the value of the property.
Consider that the $1000 rents today would be $2500 by 2047 if they only go up 3% each year for the next thirty years. If you had 100 units when you bought in the year 2017 that rented for $1000 per month, your gross potential income in 2047 will be $250,000 per month before expenses and you have no debt. If your expenses are even 50% of your income you will be putting $100,000 per month in your pocket.
Every ten months you will earn what the property originally was sold for.
For many more reasons, I love investing in apartments. While they require time, energy and attention you are buying land that has a cash flow positive business sitting on top of it combined with very powerful wealth generators. Of course, you have to know how to buy, where to buy, how to manage and when to sell.
Let’s use a real-life example:
My brother Gary wants to build wealth through rental properties but doesn’t have the time to find his own deals or run the property as he is managing his own business full time in London so he invested with me. He asked if he can invest $1,000,000 in one of my projects.
My team and I already have a 300-unit complex under contract, $36,000,000 and it requires $10,000,000 investment. I already have the loan in place and we close the deal. My brother buys 10% of the investment and I treat his money just like mine. All investors are paid a preferred return of 6% a year and at the end of the year we would distribute all surplus cash from operations.
Let’s say after management fees we were able to distribute another 4% from surplus cash flow. Then my brother would earn $100,000 the first year, and pay very little to no income tax on his earnings. If that goes as planned over the next ten years my brother earned all his money back and still has his 10% position in the property.
Over the next 10 years, assuming the rents go up just 3% a year, the property would be worth $48,000,000 and my brother’s position would be worth $4,800,000 for his original $1,000,000 investment before he shares any of his newfound wealth with his twin brother who made this happen. That is almost a 5X increase while receiving a check every month!
This example is not “pie in the sky” numbers and in fact I have achieved this many times in far fewer than ten years. Of course, you have to buy the right deal in the right markets, manage them right and sell at the right time.
This is why I created Cardone Capital and I’m allowing other accredited investors now in on my deals.
I started with $1,000,000 that is now worth 100 of times that using these strategies. You can too.
Want to chat with me about doing some real estate — you and me together? Message me right now HERE.
Grant Cardone is a New York Times bestselling author, the #1 sales trainer in the world, and an internationally renowned speaker on leadership, real estate investing, entrepreneurship, social media, and finance. His 5 privately held companies have annual revenues exceeding $100 million. Forbes named Mr. Cardone #1 of the “25 Marketing Influencers to Watch in 2017”. Grant’s straight-shooting viewpoints on the economy, the middle class, and business have made him a valuable resource for media seeking commentary and insights on real topics that matter. He regularly appears on Fox News, Fox Business, CNBC, and MSNBC, and writes for Forbes, Success Magazine, Business Insider, Entrepreneur.com, and the Huffington Post. He urges his followers and clients to make success their duty, responsibility, and obligation. He currently resides in South Florida with his wife and two daughters.