Why we invest in real estate. Part 1

I've had a few of my friends ask me why I like real estate and have been putting so much of my time towards it and figured there's a lot of other people who could benefit from hearing my thoughts!

To start, there's many different type of asset classes like single family (houses with a suite or two). Multifamily (5 suites or more, apartments etc). Mobile home parks, assisted living facilities, storage etc etc etc. For the sake of this, I'm only talking about multifamily investments.

One of the main reasons I first became interested was the cashflow it can provide. I don't come from a wealthy background, my dad was horrible with money and my mom had to do all the income producing because of it. I don't want to end up like that or have to struggle like she did and additionally once I'm set up in life, she will be too. With multifamily you have multiple streams of income coming from one place.

A good way to look at is a chair or table. If you have 4 legs and one gets kicked out it may still stand, but the slightest movement or inconvenience (Expense, vacancy etc) can put weight on the side with no leg and cause it to topple over. If you add a 5th leg, or 8 or 15 and you knock one or two or 5 out, you're still going to stand up and be supported.

If you have just a single family home with a suite or two, and you have a vacancy that's a 100% or 50% vacancy rate and can be crippling, fast!

Now multifamily assets will still appreciate, but they aren't valued the same as a residential single family house. Houses are typically valued off comps or comparable - what the houses on your street sold for. IE - They compare it to something similar to get a baseline.

With multifamily, the condition and quality of the building of course comes into play but it's valued based on it's income and cash flow. This is where the bottom line comes into play. In a 6% CAP market, assuming 50% expenses if all your rents in a 10 unit building are 600 each, i's going to be worth $600,000. If you're able to increase all those rents by 25 the value of that property just went up to $625,000.

Depending your market and local laws this can be taken advantage of quite easily. Where I'm from we can't raise the annual rent more than 2.5% which would be roughly 15 annual increase. In other markets, you can raise it how ever much you want and take advantage of it by refinancing once you've upped these rents and went back to the bank with new numbers. I don't suggest going and raising all the rents by hundreds, you're going to get some pissed off tenants and more vacancies but this is just an example.

As I said, quality and condition play a part but if it has a lot of deferred maintenance, it'll be valued a bit less and if it's up to date might be a bit more etc. The key driving factor is income.