This was the situation I found myself in while living in Vancouver, Canada, eight years ago. After consulting a few experts, I decided to relocate to Atlanta, where I could expand my real estate portfolio to include multifamily properties. Within a few years, I was able to consolidate my assets and collect more income from each property. It also drastically reduced the time spent running between individual single-family properties. Today, this multifamily real estate portfolio is worth $35 million.
If you find yourself in the same dilemma I was in eight years ago, weighing what to do next, here are a few tips to help you navigate the future of your investment strategy.
Explore New Horizons
When living in a city where real estate prices surpass the average income earner's capacity for buying a property, look for a new destination to call home. In many cases, individuals can achieve this by moving just a few hours away.
If the goal is to expand your real estate portfolio, your primary home can not be a vacuum for all your investing income. Furthermore, it should not take years to save up for the initial down payment on each property. Cities like Santa Cruz, California or Miami, although prime areas for living, would not be ideal destinations for an investor acquiring their first multifamily asset.
Buying real estate in neighbourhoods that offer the best public services, facilities, transportation, etc. will, inevitably, eat into your profit margin. Instead, target real estate in unrefined areas still undergoing gentrification, or even in a state of dilapidation, that also have a dense population. Cities like Detroit and Atlanta contain prime examples of these neighbourhoods, which might even be minutes away from the downtown core. Most importantly, property prices in these areas can be as low as $10,000-$30,000.
Once you find these golden nuggets, go big or go home. Purchase multiple properties in order to make a sizeable return that can be used toward a down payment on your first multifamily acquisition. For example, my company purchased eight single-family houses in downtown Atlanta at approximately $12,000 each in 2013. After some minor renovations and simply observing urban growth over the next five years, each house was sold for approximately $75,000-$100,000, giving us enough cash to acquire a nearby 100-bedroom hotel by 2018.
How does one predict when and where rapid gentrification will take place? Fortunately, the clues are anything but stealthy.
The most important factor to consider is location, with a bull's-eye on neighbourhoods that are close to the downtown core. Investors who can battle the disorder of these sometimes socioeconomically challenged areas, and even contribute to their refinement, could likely see sizeable dividends in four to five years.
Also, tune in to the daily news to learn about growing or emerging manufacturing hubs in different regions around the U.S. What this means for investors is that these cities will develop a bustling population and labor force ready to purchase real estate and contribute to the local economy.
Redeem Your 1031
Once you've found the right multifamily property to acquire, you can sell one or more single-family properties while using a tax-deferral initiative known as the 1031 exchange.
The policy allows you to defer capital gains tax that you would otherwise have to pay on a property you are selling to the property you are purchasing. Both properties, however, must be classified as investment properties. Neither one of them can be your primary home.
What's great about this initiative is that you would continue to defer the capital gains tax in this manner as long as the property being sold is in the same investment category as the property being purchased. Essentially, this frees up more cash to put toward the new, more expensive property. Take some time to research the policy, as there are many rules that must be followed.
Expanding your portfolio to include multifamily investments can be an exciting milestone for any investor. If it's not done prudently, however, it can become your worst nightmare. Before acquiring the first multifamily asset, investors must ensure their personal debt and primary mortgage will not eat into their investment income. If necessary, consider relocating to an area that allows you to reach your goals much faster.
Location should be a key factor when acquiring multifamily real estate. Ensure that the surrounding area is ripe for gentrification, and be aware of all the policies and initiatives that exist to promote this growth.