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Over the last 50 years investors who bought and held San Diego County apartments became and remained millionaires. Apartments have proven to be safer than other investments. Fortunes were made and lost in businesses, stocks, precious metals, bonds, industrial, and also retail investments.
If you don’t yet own apartments, they may not seem glamorous. Yet like the tortoise they have won the races repeatedly against a variety of hares. Blog 1
Why do apartments so richly reward their owners?
There are seven classic answers and then there is the rest of the story.
The seven classic answers are:
1. Leverage: 50%- 75% debt, means your equity can grow two to four times as fast;
2. Tax shelter : depreciation over 27.5 years means that $1m building that only break even produces a $25k tax shelter.
3. Cash flow: initial return on the invested capital has run from 3%- 7% in year one and climbs most years thereafter;
4. Inflation protection: democracies vote benefits “gifts from the future”. Currency is printed and inflation happens. In the last 100 years US inflation has averaged 3%.
5. Appreciation: Historically values have climbed very close to inflation ~ often more than 30% a decade.
6. Mortgage pay down: loans are often paid down more than 10% in the first decade and more than 25% in the second decade.
7. Tax Deferred Exchange: 1031 “like an interest free loan from the tax man.” With income property you can sell an asset, and buy another one and defer the taxes. That is not true for stocks or bonds.
Those reasons are all true, but they are merely the first step. Six other factors make San Diego apartments safer and provide for consistent growth. Next time we’ll consider two major laws which limit risk and boost local apartment values.