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Five Ways Investors Make Money in Real Estate


Dollar Shave Club

People know there is money to be made in multifamily real estate. But how, exactly, does an investor derive yield from owning apartments? Yes, there is income from rents. But what else- how do we get from a review of the income statement to determining investor yield?

There are four ways to make money with multifamily assets:

Appreciation – increase in value over time

Income – derived from rents and other income

Depreciation – tax benefits

Mortgage reduction – reducing debt through principal payments
An investor can potentially benefit from all four categories as a real estate owner. Whether passive or hands-on, these four categories can provide a component of investor yield What is the fifth?

Quality Asset Management
The fifth method for making money in real estate is professional expertise brought to the deal – asset management. Specifically; management that controls costs and guides or directs capital expenditures.

Controlling Controllable Expenses
The asset management function brings a high level of expertise to increasing direct and indirect income and controlling short and long-term expenditures. Succinctly: controlling controllable expenses. Without this fifth “corner” being applied to real estate ownership the other four contributors to investor yield can erode rapidly.

Asset management is what we do best.

Here is an exercise you may want to try. Take each component from the list above and attach a dollar amount to each one. Here is an example for a $5,000,000 asset.

Appreciation – assuming 1.5% appreciation, the increase in value each year is $75,000 annually

Income – lets assume $25,000 net distributed each year

Depreciation – tax benefits. This requires some research as every one’s tax bracket is different. Let’s say, $18,000 in actual tax savings for a given year

Mortgage reduction – reducing debt through principal payments. On a $3,500,000 mortgage, principal reduction is around $50,000 annually.
$75,000
$25,000
$18,000
$50,000
= $168,000

Given a cash investment of $1,500,000 the first year yield is 11.2%. In this example, asset management would probably raise this to the low teens. This is an ultra-simplistic example but it provides you with a guide to determining annual investor yield utilizing all of the components available to the investor.


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