Did you know that millionaires invest only about 30% of their money in stocks? They put roughly the same amount into real estate and spread the rest across private equities. When it comes to passively buying apartment buildings through syndications, wealthy investors earn 15% average annual returns, pay almost zero in taxes, and build wealth without managing tenants.
If you have money to invest in the stock market, you can access these same opportunities. In this article, you’ll discover five benefits of passively buying apartment buildings and why this approach generates cash flow, builds wealth, and reduces your tax burden.
1. Below Average Risk Makes Apartment Buildings More Stable Than Other Investments
Sophisticated investors always look at risk-adjusted return. They don’t just ask what return they’ll get. They ask what risk they’re willing to accept. When you compare asset classes, multifamily real estate carries below average risk compared to stocks, single-family homes, retail, or office space.
History proves this point.
Single-family houses were hit hard in 2008. During this time, the U.S. homeownership rate fell from 67.8% in the first quarter of 2008 to a low of 62.9% in the second quarter of 2016, which matched the lowest record since 1965, according to the Census Bureau.
Other assets like retail and office space took hits in 2008 and again during COVID. Multifamily real estate performed relatively stable through all of these down markets. Supply and demand explain why this happens.
There’s always demand for affordable rental housing. By affordable, I mean properties that rent for about $2,000 per month or less. Not everyone can afford to buy a house. This has been true for decades because renting typically costs less than owning. Right now, the gap between buying and renting is enormous. It’s the biggest in history, making home ownership very expensive and driving demand into rental housing.
Even during the 2008 crisis, people who lost their homes didn’t disappear. They moved into rental properties and apartments. During COVID, we worried multifamily would suffer like retail and office space. But people paid their rents because they could control keeping a roof over their heads when everything else felt uncertain. Moving forward, this trend will only get stronger. Building new affordable apartments costs too much. Construction permits are down 50% over the last 12 months because interest rates and construction costs are too high. Developers who do build focus on luxury class A properties that rent for far more than $2,000 per month. We have a fixed stock of affordable rental housing, and nothing new is being built to replace it. This makes multifamily one of the most recession-resistant investments available.
2. Passive Income Covers Living Expenses Without Active Management
Stocks and bonds don’t generate meaningful passive income unless you own a lot of them. You can count interest and dividends, or run advanced options strategies. But most people follow the 4% rule, which means you can only liquidate up to 4% of your holdings each year. If you want to generate $80,000 per year, you need a $2.5 million stock portfolio.
This is where real estate syndications come into play.
You invest as a limited partner in these syndications. A limited partner means you provide capital but don’t manage the property. You get a percentage ownership in a very large building. You receive the benefits of real estate, including cash flow and tax advantages, without doing any work.
An operator, also called a general partner, finds the deal, puts it together, manages it, and eventually exits for a profit. The general partner handles all the operations while you own a piece of large commercial real estate and receive the cash flow. It’s truly passive income.
3. Above Average Returns of 15% Beat Stock Market Performance
Real estate syndications deliver above average returns at lower risk than the stock market. The investment is less liquid because your money is tied up longer. But the trade-off is worth considering.
In a real estate syndication, it’s normal to expect a 15% average annual return. The stock market returns only about 9.5% over the last 20 years, including dividends. That’s the nominal average annual return. The real return, adjusted for inflation, is only about 6.5% to 7%. That assumes 2.5% average annual inflation, which was much higher in 2023. Your actual inflation-adjusted return from stocks is much lower than 9%.
A 15% average annual return attracts passive investors who also invest in stocks. Multifamily real estate routinely delivers this return even after fees. This return comes from two sources: the regular cash distributions you receive while owning the property and the profit when the property sells. Combined, these create the 15% average annual return that makes apartment building investments so attractive to investors looking for performance beyond what stocks deliver.
4. Extraordinary Tax Benefits Keep More Money in Your Pocket
The tax benefits from passively buying apartment buildings set this investment apart from almost everything else. Through bonus depreciation, you get to write off a large part of your real estate as a paper expense.
Depreciation means the IRS allows you to claim the building loses value over time, even though it usually gains value. With 100% bonus depreciation now available, you can deduct your entire investment in a commercial property in year one.
At the end, there will be capital gains just like anything else. Capital gains are the taxes you pay on profit when you sell an investment. But you can use tax vehicles like a 1031 exchange to reset the tax clock if you keep the money in real estate. A 1031 exchange lets you sell one property and buy another without paying capital gains taxes immediately.
Work with a CPA who knows real estate well. They can help you navigate and take advantage of these extraordinary tax benefits that you won’t find with stocks or bonds.
5. An Inflation Hedge Protects and Grows Your Wealth
The 15% return isn’t inflation-adjusted. But real estate acts as an inflation hedge, which means if inflation rises, that 15% return grows higher. An inflation hedge is an investment that maintains or increases its value when prices rise across the economy.
Real estate is a hard asset, like gold. Hard assets are physical things you can touch that have real intrinsic value. In the early 1900s, an ounce of gold could buy a very nice suit. Today, that same ounce of gold still buys a very nice suit. When recent inflation eroded the value of the US dollar, the dollar value of that ounce of gold went up because it maintains its intrinsic value.
The same thing happened with multifamily real estate in 2023. Inflation ran at 10% to 15% depending on what you were reading. It drove rents up by at least that amount. Actually, if inflation was 10%, rents went up about 20% across the country, especially in the south.
As inflation raised all expenses, including people’s rent, it increased the net operating income of the real estate. This is why commercial real estate is such a great inflation hedge. If high inflation happens again, we’ll likely see the same scenario.
Your Path to Passive Real Estate Investing
Five main benefits support adding real estate syndications to your investment portfolio:
First, multifamily real estate is recession-resistant with below average risk compared to stocks and other investments.
Second, you receive passive income and regular cash flow without the headaches of active management.
Third, you get above average returns of around 15%.
Fourth, you receive extraordinary tax benefits you won’t find with almost anything else except perhaps oil and gas.
And fifth, you own an incredible inflation hedge that protects and grows your wealth when costs rise.
If you’re looking for something outside the stock market and want to invest in real estate without buying houses or managing tenants yourself, passively buying apartment buildings through syndications offers a strong alternative.
Check out some of our resources at nighthawkequity.com to learn more about real estate syndications.