Many induvial in the top 1% (up to 80%) state that much of their wealth is the result of real estate investments. This passive income source doesn’t have the volatility of the stock market and achieves much higher returns than more traditional investments, such as bonds and savings accounts. These are a few tips for investing in multifamily real estate.

Calculate Your Yearly Rate of Return

Multifamily properties have much higher sales prices than single-family residential and some commercial real estate. Therefore, you will typically have higher down payments. You also need to understand the capitalization rate. If you borrow money, you need to know your mortgage interest rate and the length of the loan amortization. Every initial expense, including your operating expenses, should be calculated and tracked. You also need to understand depreciation and how it affects your taxes.

As you complete all these calculations, determine your yearly return on investment. If you are working with a builder, you may not make any money for one or more years while the building is constructed.

Increase Your Tax Deductions

Properties are depreciated over time. For multifamily units, that rate is 27.5 years. Your depreciation reduces the amount of taxes you owe because it reduces your asset level each year. However, you can accelerate your depreciation on other property expenses, such as appliances, fixtures, and flooring. This provides you with greater tax savings. Taking advantage of additional tax breaks can increase your return on investment each year.

Increase Your Property Value

Property typically appreciates in value. However, you can accelerate this increase by reducing your expenses and expanding your income. For example, you can adjust your rent to the market rate, and you can increase the rate further on month-to-month leases. You can also pursue additional income sources, such as vending machines and laundry facilities on the property.

Your property value also increases when you find ways to reduce your costs. Consider renegotiating vendor services, such as landscaping, waste disposal, and property management.

Learn to Leverage

Most investments require that you pay the entire cost of the investment upfront. However, real estate allows you to leverage the value of your property through debt. You can get a mortgage for up to a specific percentage of the building’s total value. Then, as you lease each unit, your tenants pay your mortgage, increasing your equity. When your equity reaches a certain amount, you can borrow against it and purchase another multifamily property, increasing your income and asset balance.

If you are looking for a highly profitable investment, do some research on the benefits of multifamily real estate.