The Real Estate Asset Class

All of us will at some point or another be involved in residential or commercial real estate.  Whether it’s signing your first apartment lease, buying a home, or investing in a mixed-use building, you will have some kind of exposure to real estate in one of its many forms.  Also, most of us will have involvement in a retirement account or the stock market at some point in our lives as well, as investing in our retirement or family’s financial well being are prudent, and frankly, necessary decisions that need to be made as soon as feasibly possible. Most people view buying stocks or bonds, or depositing money into a savings account, as their sole means of investing for retirement and building wealth.  Accordingly, many of us do not fully understand or are aware of the power of closely held real estate as an investment class.  This article will focus on the power of multi-family buildings in building wealth and providing monthly income.

In a typical three-family real estate investment in the Union / Essex County region of New Jersey, the property is acquired for approximately $100,000 – $130,000 per unit and will rent for $1,000-$1,200 per unit.  Thus, the projected purchase price will typically be $300K-$390K and the typical rent roll will be $3,000 – $3,600 per month.  The down payment that banks will require on an investment property is usually 20%-25%.  Many banks have lowered their required down payment to 20% in recent months, and my Firm fully expects that trend to continue as the economy recovers.  Typical buyer’s closing costs, covering title insurance, government recording charges, mortgage fees, and an attorney, will run approximately $10,000 in this type of transaction.  You will also want to have $5,000 as a reserve, just in case an unforeseen expenditure arises.

So, assuming the acquisition price is $350,000, the property’s total cash requirement is:

Down Payment – $70,000

Closing Costs – $10,000

Reserve – $5,000

Total – $85,000

For most of us, this is a substantial amount of money to come up with at once.  However, by purchasing the property through an LLC, the option to add partners becomes much cleaner and more practical.  Therefore, it is common for a person to acquire equity in a property for as little as $15k-$20K, depending on the manager’s terms.

Assuming a rent roll of $3,500 per month, 5% vacancy on average throughout the year (within the market for well managed properties in the New Jersey area), and market rate management fees, maintenance, insurance, utilities, and property taxes, the property monthly income statement looks like this:

Rents: $39,900

  • Taxes – ($8,000)
  • Insurance – ($1,500)
  • Management -  ($2,750)
  • Utilities – ($1,200)
  • Maintenance – ($1,800)

Operating Income: $24,650

Of course, you are taking a loan out for 80% of the total purchase price, and the loan payment needs to be factored into the overall cash flow of the property. With interest rates where they are today, and the ability to secure a 4.5-5%, 25 year note, your annual loan payments will total about $19,000.

Thus, the net cash to the investor pool becomes:

Operating Income:  $24,650

Loan Payments: ($19,000)

Net Cashflow: $5,650

If you divide this number by the overall cash invested of $85,000, you arrive at a yield of approximately 7% cash return to investors, after all expenses are included. The investors actual return is higher, because you should factor in the average appreciation of real estate of approximately 2%, in addition to the principal that will be repaid to the bank every year. The inclusion of those two factors in this analysis increases the true return on investment to approximately 15%, well in excess of historical stock market returns. Furthermore, the longer the investors hold onto the property and continue paying down the mortgage, the greater the investors’ equity in the property becomes.  This translates to long-term monthly wealth building, in addition to the distributable cash to be returned to the investment pool.

While an investment in real estate does involve risks, the selection of a quality management company will help significantly mitigate them. Further, investing in real estate partnerships will frequently require a holding period of five years or more where the investor can’t attempt to sell or redeem his interest. Overall, we feel that the benefits far outweigh any of the cons.

Please contact me at for further information in any questions regarding investing in real estate partnerships.  Please note that you may be required to be an Accredited Investor” in order to participate in certain real estate partnerships.

Thanks for reading!