Hold Real Estate Forever, Reinvest, Compound, Don’t Pay Taxes, And Get Rich Slow

Oct 5, 2019 | Multifamily, Passive Investing, Value-Add

Real estate is a long-term, get rich slow business. That’s something you hear a lot, but the math and reasoning behind it is rarely illustrated.

At Atlas REP, our investment strategy centers around buying cash-flowing value-added multifamily properties and holding long-term (10+ years). I believe multifamily real estate investing is most attractive over a long time horizon given the strong and consistent cash flow combined with significant tax benefits.

To illustrate these benefits, I wanted to show the equity growth and cash flow of a $100k real estate investment over 30 years. This was inspired by a recent Mara Poling podcast where Pat Poling describes the strategy and benefit of investing long-term in the Mara Poling total return fund.

There are several, oversimplified assumptions used in this illustration.

  • Investments are sold, and proceeds are rolled over via a 1031 Exchange every 10 years.
  • Cash flow over each 10-year investment period averages 8% per year.
  • Equity value grows 9% per year over each of the 10-year periods.
  • The cash received is not reinvested back into the fund.

Over the 30-year investment, you would have received $631k in distributions and your $100k investment would now be worth over $1M.

Looking at these numbers, you may think it’s too good to be true, but that’s the power compounding, long-term investing, and growing your investment pre-tax.

If the gross dollars weren’t attractive enough, the tax exposure on the gains and cash flow is reduced/deferred through depreciation benefits which enable investors to defer income and turn it into long-term gain and gains are deferred through 1031’s. At the end of the 30 years, investors may pay some tax, but it will be a long-term gain tax which is at favorable rates.

Despite the enormity of equity growth, it’s difficult to have the patience to invest for 30 years. This reminds me of something Jeff Bezos said about a conversation with Warren Buffet.

“Jeff, what’s the best advice Warren Buffet ever gave you?”

Bezos: “I asked Warren, your investment thesis is so simple…you’re the second richest guy in the word, and it’s so simple. Why doesn’t everyone just copy you?”

Buffet: “Because nobody wants to get rich slow.”

Getting rich slow isn’t sexy, but compounding and patience are powerful. In my opinion, there’s no better path to long-term wealth than private real estate investing.

The Power of Compounding and Patience