When I was 21 years old I bought my first property, a modest townhouse in Blacksburg, VA for less than $100,000, and used a FHA loan put down around $3000 to purchase the property. Over the next 5 years I rapidly built a portfolio of properties totaling more than $2M in value. My plan was: 

1. Buy enough properties to produce a cashflow of $10,000 per month. 

2. Get a high-paying job 

3. Pay the mortgages off over the ensuing 15 years, so that I could be financially independent by the age of 40. 

Fast forward 10 years. My plan was right on track. Despite going through one of the worst real estate crashes in modern history I still owned my properties and they were all cash flow positive. I was now married and had 2 wonderful sons. I was working harder than ever before and making the most money of my career. I was also paying a very high percentage of my (W2) income in taxes. My wife went back to work and we discovered from our CPA that after paying for childcare and the additional taxes, it COST us $10,000 for my wife to work that year! Unfortunately this is a problem that many dual income households face. We started looking at making changes in our life and the way we worked and made money. My wife decided that she wanted to continue to grow her architecture practice that she had worked 10 years to develop instead of being a stay-at-home mother. I was very supportive of this decision, so we decided to analyze every part of our income and investment strategy. 

During the review of my real estate portfolio I discovered something surprising; my rate of return that started out at over 30% had slowly eroded to around 7% or about 3-4% after taxes. How could this be? As the equity in my properties grew my rate of return as a percentage of equity dropped precipitously. In addition, my wife and I phased out of all of the tax benefits of owning real estate. So we paid a high marginal rate on this income. There had to be a better way! 

While at a business planning meeting with my wife I was lamenting the performance of my real estate portfolio when the gentlemen I was speaking to suggested looking into the multifamily space. Being open-minded and always looking for improvement in my financial performance I reached out to some operators in the space and interviewed them on their operations, markets, and benefits of being an investor. What I discovered was that there were some key differences between owning residential properties and multifamily properties:  

1. Being an investor is 100% passive; you have an asset manager that handles all of the day-to-day aspects of the investment. This means no more phone calls while on vacation to deal with a bad tenant or a broken appliance! 

2. High-income investors retain the tax benefits of owning real estate; which means better after-tax returns 

3. Your investment returns SCALE; instead of returns eroding over time as they do with residential real estate, an investment in the multifamily space can continue to grow at double-digit rates due to its unique characteristics compared to residential real estate. 

4. Debt is non-recourse. What does this mean? If your tenant leaves town and doesn’t pay rent or you have a lawsuit, then the bank won’t come for your personal assets. For high net worth investors this can often be the most important difference in asset classes. 

5. Appreciation can be controlled. The value of multifamily property is based on Net Operating Income (NOI), like a business. So if you increase the NOI the value goes up. This is how you can project the range of returns for a property where you are making improvements and increasing rents. 

Over the next 3 years I sold all of my residential properties and moved our equity into commercial (multifamily) properties. The benefits I received were not only less hassles and management, but also higher returns, and lower taxes, which ultimately meant we were keeping more money with less work! 

Two years after our first investment, my partner and I began to syndicate our own deals after developing deep relationships in our target markets. If you’d like to learn how I used the Next-Level Income strategy to build a portfolio of passive income investments, go to our website to get a free copy of my book and learn how to get access to these types of opportunities.