Co-founder and Managing Partner of Disrupt Equity. Learn more about our multi-family investment opportunities by visiting our website.
Many people want to build wealth to ensure that future generations have a solid financial foundation and security. This kind of wealth is different from having enough to retire; it is achieving true, lasting freedom for yourself and generations to come.
Real estate has long been a way to build this, as capital growth combined with passive income makes these investments scalable and repeatable.
Unfortunately, when people think of real estate, people often think of buying and renting single-family homes. While there is nothing wrong with that, it is often a long road to generational wealth. Instead, I find that if you want to build long-lasting wealth through real estate, there are five strategies to consider.
A Quick Definition: What is Generational Wealth?
Before we get into the strategies, it’s worth discussing what the phrase generation wealth means. Generational wealth refers to assets and financial resources that are passed down from one generation to the next. It differs from concepts such as financial freedom, which refers to enjoying life immediately. Generational wealth, on the other hand, refers to a legacy that can include tangible assets, a business, real estate, investments, and other income-generating instruments that you can pass on.
I believe that investing in a real estate syndication is one of the most important ways families can build long-term wealth.
Real estate syndications are basically pools of investors who will purchase a commercial or multi-family building (often apartments). The project leader, or general partner, does all the work while the investors, known as the limited partners, handle the finances.
While all investments carry the risk of loss, syndications are often a popular choice because they can generate significant returns quickly. For example, a syndication can offer 8% returns over five years and a 50% increase on your initial capital investment at maturity. A hypothetical investment in a syndicate with those terms would nearly double his money in five years.
The managing partner will use the capital to renovate and renovate the buildings, and make improvements that will allow the syndication to charge higher rents. Since commercial real estate derives value from rents, these increases mean they are worth more. After about five years, most syndicates try to end the deal and sell the newly renovated building for a significant profit, with the limited partners receiving a portion of the rents and a portion of the sale of the building.
2. Invest in multi-family homes
Of course, you don’t need a syndicate to invest in multi-family real estate. Depending on your financial resources, you can invest in multi-family homes yourself. Any building with more than four units is technically “multifamily,” so it is often possible to find a reasonably priced building that qualifies.
There are quite a few advantages of multi-family homes over single-family homes. The main benefit, however, is cash flow. With a single-tenant property, you run a greater risk of cash flow loss. If the tenant moves out and the property is left vacant, essentially all cash flow has stopped. With a multi-family home, the risk of this is much smaller, because several tenants ensure that the cash flow remains more stable. When tenants move out, other tenants stay and new tenants move in.
While single-family homes are good, multi-family homes are better for building generational wealth. A few multi-family homes can assure you and future generations of adequate passive income.
3. Invest in REITs (Real Estate Investment Trusts)
Companies that own and usually manage income-producing real estate are known as REITs. The public can trade REITs on well-known exchanges. With a REIT, you buy stock in a company that owns the asset, you don’t own the underlying property.
The returns on REITs are usually not the same as on syndicated investing. Because syndications affect both the cash flow and the sale of the property, returns can be much higher. Since REITs are publicly traded on major exchanges, they are more closely aligned with typical stock market returns. Still, they’re a great way to quickly diversify your real estate portfolio, especially if you’re growing your wealth.
4. The BRRRR Method
The BRRRR method is short for “buy, rehab, rent, refinance, repeat.” It is a strategy where people can buy distressed real estate, rent it out and use the equity to fund further investments.
A typical BRRRR flip is finding a dilapidated property. This property typically has cosmetic repairs that are relatively easy to fix (the more you can do yourself, the better), but will hurt the selling price. For example, someone using the BRRRR method might find a house with outdated paint colors, old cabinets, and outdated appliances. These are relatively simple solutions, but can hinder a sale, resulting in a low price.
After buying the house, you would renovate it and rent it out. Once you find a tenant, refinance the property and use that money as a down payment on another property to repeat the process.
Generation wealth through real estate
Generational wealth is more accessible through real estate than people realize. Combining real estate strategies such as investing in REITs or multi-family syndications, using the BRRRR method, and home hacking can be excellent ways to build generational wealth.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.