Cost Segregation in Multifamily: When It Makes Sense and When It Doesn’t If you buy a $10M apartment building, how much depreciation should you get in year one? For many investors, the answer depends on cost segregation and bonus depreciation. You’ll often hear people say cost segregation creates massive tax savings in real estate. And in the right situations, it absolutely can. But it’s also frequently misunderstood. Cost segregation doesn’t create new deductions. It simply changes when the IRS allows you to take them. What Cost Segregation Actually Is By default, residential real estate depreciates over 27.5 years. A cost segregation study analyzes the property and separates parts of the building that the IRS allows to depreciate faster. For example: 5-year property • Appliances • Certain fixtures • Carpeting 7-year property • Some equipment and removable property 15-year property • Land improvements like parking lots, sidewalks, and landscaping Instead of treating the entire building as one asset, the study identifies pieces of the property that can be depreciated on shorter schedules. Cost segregation essentially separates portions of the property that the IRS allows to depreciate faster than the standard 27.5-year schedule. Many investors confuse cost segregation with bonus depreciation, but they serve different roles. Cost segregation identifies and qualifies the components. Bonus depreciation determines how quickly those qualified components can be deducted. The study itself doesn’t create deductions. It simply allows investors to take more depreciation earlier in the ownership period. With 100% bonus depreciation active, those components can often be fully expensed in year one. Even without bonus depreciation, these shorter-life assets still depreciate faster because they use accelerated methods like the 200% declining balance for 5- and 7-year property and 150% declining balance for 15-year property, which front-loads depreciation into the early years.

After three years in multifamily operations and underwriting over $250M in potential acquisitions, I wanted to share some of my observations and perspectives. I am not claiming to know everything about this stuff, because I certainly do not. I’m still learning every day, but I hope these insights prove useful and spark conversation about important topics in the multifamily world. Here is the thought I will be unpacking today: There is often a noticeable pricing and cap rate gap between 1970s vintage product and late 80s / early 90s vintage assets, even when they sit in the same submarket. For seasoned investors this may seem obvious, but I think it’s worth breaking down the underlying reasons. If you feel I missed anything feel free to comment and let me know. Below are some of the biggest reasons I believe this gap exists, along with a few things I personally look for when underwriting and touring these types of assets. TLDR: 1970s multifamily properties often trade at higher cap rates because they carry more operational and capital risk. Aging/out-dated plumbing, environmental considerations, insurance friction, and dated layouts all contribute to the discount compared to late-80s or early-90s product. But with careful diligence and the right business plan, that discount can also create opportunity. --- Why the market discounts 1970s product 1. Major systems are closer to the end of their life Many 1970s properties are approaching replacement cycles on multiple systems at once: Roofs Plumbing Electrical panels Parking lots HVAC systems When several of these items hit their replacement window at the same time, buyers must underwrite meaningful near-term CapEx. That risk gets priced directly into the purchase price. This can be the case with 80’s and 90’s product as well, but you may be going on even ANOTHER replacement cycle for some of these systems. 2. Plumbing systems and repipe risk One of the biggest dividing lines between vintages is plumbing materials.

We just closed on a 121-unit in Fort Worth. Here are some things that a spreadsheet doesn’t tell you. Lender requirements can shift late in the process. We were initially expecting agency debt, but last minute requirements changed and the proceeds no longer worked for the deal. So we pivoted to bridge. Good thing we had already modeled bridge from the start. You may have to restructure entities to align with lender expectations. We formed a new borrower entity late in the process and updated the org chart to match what the lender required. That meant new documents, new approvals, and making sure everything flowed correctly from a legal and ownership standpoint before we could close. Multiple legal teams get involved. Lender counsel, borrower counsel, title, everyone reviewing language and redlining documents. A lot of back and forth. Signature pages get revised. Loan agreements get updated. You think you are done, then another comment comes in. Title items can surface that have to be cleared before anyone wires money. In our case, there were legacy items that had to be resolved before we could get clean title. That meant coordination and making sure everything was cleared so funding could happen. None of that shows up on a spreadsheet. Getting this deal to closing was a different animal. Glad we got it done. Now the real work begins.

Focus on solving problems and working hard in a nitch, instead of obsessing over materialistic desires like fancy cars or penthouses. Entrepreneurship is about dedication and focus, not just filling your pockets. Cut out distractions and focus on the work, not the outcome. There are two main ways to make money: 1.dedicating your time to something profitable or 2. using your money to generate more money. Curious how to maximise and scale your earning potentials Comment 'info' Cut out the noise and stay focused on what truly matters. See you at the top

Storm hit one of our multifamily properties. Most people see damage. We see an opportunity to reset the asset. New siding. Roof repairs. Exterior upgrades. All coordinated through an insurance claim while improving long-term durability and curb appeal. This is what real operators do: • Protect the downside • Improve the asset • Come back stronger than before Multifamily isn’t passive , it's active management, smart decisions, and turning problems into value.