Take a moment to think about the process you used to find the home you live in.
You probably had a checklist (written or mental) that included a specific area, school district, commute, and the number of bedrooms you were looking for. If you were looking for a three-bedroom with plenty of green space in mind for your growing family, it’s very unlikely you would have settled for a one-bedroom high-rise condo, even one with a great view.
Well, it’s the same type of situation when you’re investing in real estate. Before you even begin to consider potential investment opportunities, it’s imperative you know WHY you’re investing and WHAT you want to get out of it.
Without clear goals, you’ll easily be swayed (or paralyzed) by beautiful photos and well-marketed opportunities that don’t align with your investing goals.
As we walk through these examples, see if one resonates with you. With clear
goals in mind, you’ll know just what to do when the right investment
opportunity comes along.
Investing Goal Example #1: Investing for Cash Flow
Brad and Katie both work full time and are parents of school-age children. While Katie’s income is great, she feels the meetings, commute, and other daily hassles aren’t worth her time away from the house.
So, they’d like to create passive income of about $2,000 per month, which – combined with Brad’s income – would fully cover their expenses and contributions to savings, giving Katie the freedom to quit working. Finding investments that will provide steady cash flow now would replace her income and allow her to stay home with their children and be fully present.
If Brad and Katie require $24,000 per year ($2,000 per month) in income, they would need to invest roughly $300,000 if expected returns are about 8%.
$300,000 invested x 8% cash flow returns = $24,000 in passive income per year.
Of course, they’ll receive a larger nest egg from the sales profits in three to five years, but that doesn’t help them right now. Therefore, with this knowledge and these numbers in mind, Brad and Katie should focus on cash flow first and foremost. That means that any investments with lower projected cash flow returns should automatically be discarded, and any opportunities reflecting 8% or higher should really get their attention.
Investing Goal Example #2: Investing for Appreciation
Marcus, meanwhile, is single with no children, is retired from the military
and receiving a pension, has excellent cash flow, and isn’t necessarily
interested in quitting his well-paying full-time job. Therefore, he’s more
interested in the potential appreciation that can result when a deal greatly
out-performs the projections.
He’s seen how property values have experienced huge upswings, and he loves the idea of investing in large expanding cities where rent appreciation (which causes value appreciation) out-perform the national average, such as Phoenix, Dallas/Fort Worth, or Charlotte. He’s aware of the higher risk of focusing on appreciation and the amount of time he’ll have to wait until payout, and he’s okay with that since his current cash flow situation is strong.
Even if his investment doesn’t appreciate as much as expected, that’s alright with him. He’s more interested in the “chance” that it might. And the cash flow he’ll get during the holding period is icing on the cake.
Common investment advice is that these types of investments are riskier and that you should always invest for cash flow. However, there are investors with a higher risk tolerance who will voluntarily take on the risk for the possibility of appreciation.
In this case, Marcus is aware of the pros and cons, knows that there are winners and losers in this game, and looks for value-add deals in appreciating markets to increase his chance for high returns.
The Hybrid: Investing for Cash Flow AND Appreciation
If you didn’t really feel comfortable in either Brad and Katie’s or Marcus’s shoes, that’s okay! That just means you’re among the majority who’d prefer a mix of cash flow AND appreciation.
Investments that provide cash flow throughout the project in addition to the potential for appreciation are the kinds of deals we target. Don’t be afraid to seek that sweet spot – where you get ongoing cash flow to cover living expenses, plus the potential for capital appreciation later on in the project.
Know Your Goals
The investment summaries for real estate syndication opportunities are made to attract your attention with pretty colors and beautiful photos, which is exactly why it’s important
to know your purpose for investing in the
first place.
When a deal does come along that aligns with your goals, you’ll be able to confidently flip past the gorgeous pictures, focus on the numbers and the business plan, and pounce quickly, without second-guessing yourself.
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