In multifamily investing, the conventional buy-and-hold approach is not the only option. Instead, the investors can get creative by incorporating compound interest strategies into their multifamily investments, thus unlocking the potential for maximum profits. Albert Einstein highlights the power of compound interest in his famous quote:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Compounding involves reinvesting your investment returns back into the investment, allowing the returns to compound and grow exponentially. By reinvesting your returns, you can accelerate and enhance the growth of your portfolio in a more efficient manner.
In this blog, we will discuss a few methods that an investor can adopt to harness the power of the compound effect in their multifamily investing journey.
The major compounding benefit of multifamily investing comes from reinvesting the rental and other property income to create more recurring income. The cash flow from existing multifamily properties can be invested to buy more properties, which opens the door to multiple cash flow streams.
The simple math involved here is saving up the cash flow to make a down payment for the second investment, and then further saving cash flow from these 2 investments to make a down payment for the third investment. This technique yields an exponentially rising graph of cash flow, thus cascading the profits earned via multifamily investing.
Refinancing is taking out a new loan on a multi-unit property to improve the terms of the existing loan. Refinancing can help alter the rate and term of loan payments. You can use this to lower your monthly payment, thus, using the saved money to expand the investment portfolio or to shorten the loan term and pay it off faster. Refinancing can help settle existing debts, liquidate cash to invest in renovation or down payment of new assets, and procure low interest rates.
By using the powerful tool of refinancing in your multifamily investing strategies, you can acquire new assets faster than you normally would have and force appreciation on the existing assets, thus compounding your invested money exponentially.
Using your existing equity in your multifamily investment property, you can avail the cash-out refinancing option. With the cash-out refinancing option, you can take a larger loan from the existing loan, and the remaining amount is paid in cash. This cash can then be used to make a down payment on a new property or update an existing property and force appreciation in multifamily investments.
By reinvesting your cash flow, you can continue to grow your portfolio without having to invest additional capital. This can help you quickly scale up your investments and take advantage of the power of compounding.
Leverage involves utilizing borrowed money as an investment’s funding source. By harnessing the power of leverage in multifamily real estate, you can finance larger assets than what would have been possible with your own money and in turn, thereby yielding a higher return on your investment. Even though leverage comes with a risk, it can be balanced by generating a decent NOI every year. Revamping your property to lure tenants and force appreciation on returns is an excellent way of getting higher returns.
This increase in cash flow using other people’s money, which is, in turn, used to pay the money back and invest the remaining profit in further investments is another excellent demonstration of the compounding effect of multifamily investments.
In addition to reinvesting your cash flow and using refinancing to grow your portfolio, you can also appreciate the value of your existing properties by remodeling them. Remodeled properties earn higher rents, as tenants are willing to pay a premium for properties that offer extra amenities and upgrades. By putting in your investment capital gains in the improvements of your existing properties, you can increase their value and generate higher returns.
It depends on your financial goals whether you want to reinvest multifamily returns or spend it. If you’re seeking financial freedom and a substantial nest after retirement to maintain your lifestyle, reinvesting real estate profits into other deals will prove beneficial. Your investment goals should not be restricted to earning more profit per unit, but accumulating more profitable units and diversifying your portfolio.
Do not prioritize short-term profit over long-term growth. The benefits of compound interest are only realized over a long period of time. This brings us to another important tip for investing: START EARLY. The compounding process works best if you start investing early and stay invested for the long term.