It happens to the best of us – we get caught up in economic news and assumptions about where the market is going, and we can’t help but wonder, “What’s the best investment strategy in today’s environment?”
Once you decide you’re going to invest in a real estate syndication and you get past the questions about risk, rates of return, and how real estate syndications work, your concern naturally pivots toward what investment strategy is best.
You want to know what to look for, what’s a red flag, and what you should or shouldn’t do based on the current market cycle and the most recent economic conditions. You might think “This year the market climate is different than any other, so my investing strategy should compensate me for that, right?”
Well, the only constant in life is change. The most important thing is that you know what the two main strategies are and why each is important. From there, you can make an informed decision no matter what the economy and the market are doing.
Two Investing Strategies
The two most common and widely discussed overarching investment strategies in any type of real estate are:
- Equity Growth Strategy
- Cash Flow Strategy
Both strategies are essential to the bigger picture of your financial future, and you’ve got to understand each one and how it might affect your financial situation in order to strategize appropriately.
A growth-focused investment strategy is focused on buying low and selling high, creating a gap of profit (i.e., growth or appreciation) between the two transactions. Some great examples of this in residential properties are foreclosures and fix-and-flips.
By comparison, in commercial real estate syndication deals, the business plan may give you details such as buying an undervalued or distressed property at a low cost basis, conducting value-add renovations, and selling at a much higher market price. This might be a quick turnaround deal and the expected cashflow might be lower than other deals.
On the other hand, in cashflow-focused real estate strategies, you buy and hold with the expectation of constant distributions, and the business plan might plan to hold the property for a longer period of time. Rental properties with existing, faithful tenants like in large apartment complexes are great examples. There might be some natural appreciation in the deal, but the most attractive quality highlighted in the business plan is the predictable returns.
The Equity Growth Plan
The caveat to pursuing growth only is that you have to know a property’s actual value and the market trajectory, almost guaranteeing you’re getting a great deal on the buy.
In real estate, there’s a saying:
“You make your money when you buy, not when you sell.”
It means that you can’t rely on what you think the price should be, that you can’t rely on market appreciation, and that you definitely shouldn’t be counting on renovations to make the deal profitable. In other words, you must buy at a discount so that you can sell for a profit.
The equity growth strategy may require that you have a separate income to support both your lifestyle and the asset throughout the time you own it. If a property isn’t providing you any monthly income, you still have your bills, transportation, and food to pay for, including the property’s mortgage, insurance, and any repairs that come up before you sell.
A narrow focus on investing for equity growth comes with an inherent business risk since you must be prepared to hold and sustain the asset through market dips, perhaps without any returns from the investment, until you can sell for your desired gain.
One more thing. If your goal is to sell when the property appreciates 20% (for example), you have to be disciplined enough to sell right then. Some investors get hung up when they decide to “just hold it another year, because the market’s skyrocketing right now”…but things crash six months later.
The Cash Flow Plan
Planning solely for cash flow is about consistent monthly or quarterly distributions over the long term. It’s not about trying to time the market, buy low, or create a big spread. In an ideal cashflowing investment, there’s enough income each month to cover property costs like the mortgage and insurance, plus renovations or repairs needed, and still have some profit left.
On cashflowing properties, you always have to assess sustainability over the long term. Meaning, how sustainable is the profit each month? With a single-family home, if you’ve got $100 after the mortgage and insurance is paid, then yes, the property is cashflowing. But what happens when you have to replace the hot water heater for $800? That means eight months’ worth of profit. So you have to assess if the profit made after expenses each month is really sustainable and if the investment property will still be profitable if you have a repair or two.
Another consideration is, for example, with that same $100 in profit on a single-family rental each month, what if the market contracts and you have a hard time finding a tenant? Lowering rental rates to fill the unit might mean the property is no longer cashflowing. You have to know ahead of time how you’ll handle that and decide the rate of cash flow you require on a property so ownership is sustainable long-term.
A caveat to a cashflow-only focused investment plan can leave you blind to the long-term wealth-building potential of appreciation, especially if the cash flow is funding your lifestyle instead of being reinvested.
Related Article: Cash Flow in a Real Estate Syndication – Where Does It Come From?
Why Not Both?
The good news is that the answer to the question, “What’s the best investment strategy for me in today’s environment?” is not one or the other. You can pick both!
You can absolutely earn steady passive cash flow AND enjoy the wealth-building power of appreciation by pursuing commercial real estate syndication investments featuring both benefits at the same time.
Don’t corner yourself into cashflowing properties that have little to no long-term expected appreciation…
Don’t hamper your cash flow by investing in properties that only focus on equity growth.
Here at BluSky Equity Partners, we believe the best way to build wealth and freedom simultaneously is to invest in real estate syndications with cash flow and appreciation built into each deal.
Deciding Which Plan is Best for You Right Now
Ultimately, your personal situation and your investing goals will determine which features you prefer in an investment opportunity. If you don’t need cash flow now and are focused on building your retirement account that you won’t touch for another 30 years, then aggressive appreciation-focused (i.e., equity growth) deals might be your focus.
On the other hand, if cash flow would allow your spouse to ditch the corporate stress and fulfill dreams of being more present with the family, then a reliable, cashflow-focused syndication might make you the happiest.
Before you choose a particular strategy, consider what might be in your life’s near and distant future, and then explore how investing in real estate syndications might support that vision. Ask yourself about any significant shifts that might occur within the next five years, like graduations, weddings, daycare, public schools, new cars, moves, additional education, or career changes. Feel free to bounce your ideas off us if you want some feedback.
With a clear plan for where you’re going, it will be much easier to determine which investment strategy is best for you. Only then will you be confident investing in real estate syndication deals aligned with the growth plan, the cash flow plan, or a mix of both.
Further Reading: Exploring Projected Returns in a Real Estate Syndication