What is the Best Investment? The Stock Market or Real Estate? The future of the stock market just isn’t as stable as it once was. Thousands of people are wondering how they can possibly plan for their financial future with the uncertainty and volatility of the stock market.

 

There is an alternative answer to the stock market and will bring you better and faster returns than ever before.

 

Stock Market Returns Will Surprise You

 

The average stock market return over the last 15 years was 7.04% from 2005 to 2019 and 9.06% over the last 30 years from 1990 to 2019. That means that if you invested $100,000 in 2004 it would be worth $277,454 in 2018, which doesn’t seem that bad, but there’s more to calculate.

 

Market Volatility 

 

Most investors don’t realize that the same $100,000 isn’t actually worth $277,454 fifteen years later, because of the volatility of the stock market year after year. Actually, that same $100,000 is actually worth $225,425, which is only a 5.6% return compounded annually. Not nearly as good but not too bad, until you realize that these returns are before brokerage fees!

 

Fee’d to Death

 

The average expense ratio for actively managed mutual funds is between .5% and 1% and can go as high as 2.5% or more. For passive index funds (ETFs), the typical ratio is .2%. Most investors have a blended portfolio of ETFs and mutual funds, so let’s assume the average fee is 1% per year. After taking out a 1% fee each year, instead of being worth $225,425, your $100K, invested fifteen years ago, is now only worth $193,879. That’s only a 4.5% annually compounded return!

 

Taxes

 

Let’s not forget taxes! If you’re filing jointly and making more than $77,201, your long term capital gains rate is 15%. If you sold your entire portfolio, the taxes you’d have to pay would push your average annual return from 4.5% to 4.0%. 

 

Inflation – The Silent Killer

 

According to the Federal Reserve website, the annual inflation target is 2%. In fact, the Federal Reserve has done a good job meeting their stated objective by achieving an actual inflation rate of 1.6% over the past ten years. Of course, inflation silently erodes the buying power of your portfolio. Compounded over fifteen years, an inflation rate of 1.6% reduces your after tax return from 4.0% to 2.5%. Wow. On top of that, inflation has been rising significantly over the last 2-3 years and the CPI has been hovering around 8-9% as of mid 2022... There has to be a better way.

 

What does this mean?

 

All of this means that if you invested $100,000 in 2004, your actual return, i.e. the kind of return you can actually BUY something with in 2018 dollars after you pay brokerage fees and taxes is a mere 2.5% compounded per year. More specifically, after getting your initial investment back, you have $44,382 in net gains after fifteen years. I’m not sure if you thought about investing in the stock market that way, but it makes me angry, and maybe it makes you angry too. Here you manage to save and invest $100,000 and patiently keep it invested for a LONG time. And when it’s time to sell, for example to pay for your kids’ college education, you’ve actually made very little money while paying your broker and the government along the way. Oh, and in the meantime, your purchasing power went down due to inflation! There just has to be a better way to create wealth from an investment.

 

Multifamily Syndication

 

Multifamily syndication is one of the most ideal investments you can make with your capital. Multifamily syndication is where a group of people pool their resources together in order to purchase a multifamily property, such as an apartment building or mobile home park, which would otherwise be difficult or impossible to achieve on their own. This typically involves general partners who organize and oversee the syndication, which includes things like securing financing, managing the property, due diligence on the property, and handling investor relations. Then there are the limited partners or passive investors, which is you! In return for your investment, the limited partners receive an equity share in the syndication along with cashflow distributions and profits.

 

Benefits of Multifamily Syndication

 

There are five main advantages of passively investing in multifamily syndications over any other investment.

1. Below-Average Risk

2. Above Average Returns 

3. Passive Income

4. Outstanding Tax Benefits

5. Inflation Hedge

 

Below Average Risk

 

Perhaps the greatest advantage of investing in Multifamily syndications is its low risk profile. For decades, the multifamily market has proven much less volatile than residential real estate, the stock market, and cryptocurrency! When the housing market crashed in 2008, the delinquency rates on Freddie Mac single-family loans soared, hitting 4% in 2010. On the contrary, delinquency on multifamily loans peaked at .4%. So, if you’re looking for a recession-proof way to invest your money, there is no better option than multifamily syndication investing.

 

Above-Average Returns

 

As we’ve seen, the average stock market return over the last 15 years was 7.04% but after fees, inflation, and taxes, that return becomes a measly 2.5%. On the other hand, multifamily syndications routinely return average annual returns of 12% and above. That’s compounded and after fees, inflation, and yes, even taxes. 

 

Passive Income

 

Unlike stocks and bonds, multifamily syndications generate cash flow for its investors from the income generated by the property. The cash flow afforded by multifamily investing generates the kind of passive income that leads to financial freedom. The magnificent part is that the multifamily asset itself is appreciating in value over time and can be usually sold for a significant profit. The combination of passive income and appreciation lends itself to the kind of generational wealth that you can happily pass on to your children! 

 

Outstanding Tax Benefits

 

Real estate has advantages over nearly every other investment, from stocks and bonds to business investments to precious metals. The IRS allows multifamily investors to write off 3.6% of the value of the building each year as an expense through what the government calls “depreciation”. This is only a phantom expense, meaning it doesn’t actually cost you anything, but it does reduce your taxable income. The reason for this is simple, the U.S. government wants people to invest in real estate; it’s actually a tax incentive, and it’s required by law.

 

Let’s illustrate the beauty of depreciation in this example. Let’s say you invest $100K in a multifamily syndication and make 12% cash-on-cash return (or $12,000) in a particular year. It appears that you should be paying taxes on your $12,000 gain, but that’s without the magic of depreciation. 

 

Purchase Price - $500,000

Down Payment (20%) - $100,000

Debt - $400,000

Cash on Cash Return % - 12%

Cash on Cash Return $ - $12,000

Tax Depreciation % - 3.6%

Tax Depreciation $ - $18,000

Taxable Loss - $6,000

 

The main thing to note here is that the $12,000 you put into your pocket is entirely tax free. Instead of showing a taxable income, your tax return shows a taxable loss. Simply astounding! You can even “carry forward” your “loss” to future years, or you can use it to offset gains from other passive income, further reducing (or even eliminating) taxes in the future! Can your stocks do this??

 

Depreciation is a benefit of ALL real estate investments, but multifamily gives you an additional tax bonus rightfully called “bonus depreciation”. Passed by President Trump, bonus depreciation allows us to deduct the entire value of the investment from our taxable income in the first year, instead of previously waiting the 27 ½ years to space it out. This produces a GIGANTIC tax loss that we can carry forward and apply to other passive income, which will once again reduce or eliminate our taxes paid on any gain. And if we sell for huge profit at the end, we can do what’s called a 1031 Exchange that allows us to defer taxes indefinitely. Quite literally, no other investment in the world offers such astounding tax benefits. 

 

Inflation Hedge

 

Multifamily investments are a fantastic hedge against inflation. If you recall, the Federal Reserve’s inflation target is 2% each year, which means everything goes up in costs, including rents. As income goes up, so does the value of the property. Now, also so does the expenses, but that doesn’t mean the net operating income will remain the same.

 

Let’s take a look at this example and watch what happens to the net operating income.