You’ve come a long way, but now the path splits and you don’t know which route to take. To the right, you’ve got consistent cashflow. To the left, there’s appreciation on the property and opportunity for massive gains. How do you know which strategy is best, not just for you but based on today’s economic climate and market cycles?
You’re all clear on the risk, rates of return, and how real estate syndications work but, the election, stock market volatility, high-priced real estate in your area, and murmurs from the real estate investing crowd have you hesitant.
Whether you’re new or seasoned in real estate investing, it’s worth taking a step back and re-evaluating your strategy sometimes. New babies are born, kids move off to college, you might change careers – life happens!
The only constant in life is change, so the important thing is that you know what the main two strategies are and why each is important. From there, you can make an informed decision no matter how complicated your family life, the economy, or market conditions become!
Most real estate syndication investors are after one of two things, either cashflow or gains. Both are essential pieces of the puzzle, and you’ve got to know about each one and the role it plays toward your investing goals to strategize appropriately.
A gains-focused investor is focused primarily on buying low and selling high, creating gain (or profit) between the purchase price and sale price. Foreclosures and fix-and-flips are often aligned with this strategy because you’d buy undervalued property at a discount, do some light renovations, and sell at a much higher market price.
On the other hand, a cashflow-focused investor would buy and hold a property with the expectation of consistent rental income. There might be some natural appreciation in the deal, but the most attractive quality is the predictable returns.
The main requirement to effectively executing a solid gains strategy is your knowledge of the asset’s actual value and the market cycle.
In real estate, there’s a saying – “You make your money when you buy, not when you sell.”
You have to know (not guess) what the true value of the asset is AND where the market is headed. You can’t rely on what you think the price should be, you can’t rely on appreciation, and you definitely can’t bank on renovations to magically make the property profitable.
In other words, you must buy at a discount so that you can sell for a profit.
On top of that, a practical gains investing strategy requires you to have a separate income. Assuming the property isn’t providing you any cashflow, you still have your own bills, transportation, and food to pay for, including mortgage, management, and possibly renovations on the investment property.
A narrow focus on investing for gains comes with an inherent business risk since you have to cashflow everything until the dotted line is signed and funding goes through. You must be prepared to hold and sustain the asset through market dips, without any returns from the investment, until you can sell for your desired gains.
Pursuing the cashflow strategy is about reliable distributions over the long-term. It’s not about timing the market, buying low, or creating a big spread. In an ideal cashflow investment, there’s enough distributed each month to cover property costs like the mortgage and insurance, plus renovations or repairs needed, and still have some profit left.
On cash-flowing properties, you always have to assess the longevity of the yield. Meaning, how sustainable is the profit each month? If you’ve got $100 after the mortgage and insurance are paid, fabulous, and yes, the property is cash-flowing.
But what happens when you have to pay $500 for plumbing repairs? That means for five months, you have $0 in profit. So you have to decide if the profit each month is sustainable for the long-haul and if the investment property will still be profitable if you have a repair or two.
Focusing solely on cashflow investment properties can leave you blind to the long-term wealth-building potential of appreciation, especially if the cashflow is funding your lifestyle instead of being reinvested.
Here’s the thing, the answer to the strategy question isn’t binary. In fact, it’s a great strategy to invest in both! You can have a steady passive income from the cashflow and enjoy the long-term wealth-building power of appreciation by pursuing real estate investment opportunities with both features at the same time.
Don’t:
We believe the best way to build wealth is to invest in real estate syndications with predictable cashflow and appreciation built into each deal. Instead of hitting a home run in one strategy or the other, you have a balanced approach to building wealth and creating an income.
Your personal situation and your investing goals will determine which investment strategy you’ll choose. If you don’t need cashflow right now and are focused on building your retirement account only, then the gains strategy might be your jam.
On the other hand, if some monthly distributions would change your life, then the cashflow strategy could be your golden ticket.
Before you pick a particular strategy, take a step back and visualize what changes, events, and people might be in your life five years from now. 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.
Then, explore how investing in real estate syndications might help support that vision. When you have a clear destination in mind, it will be much easier to determine which investment strategy might support those goals. Only then will you know to invest for gains, for cashflow, or both.
Author: Whitney Elkins-Hutten, Goodegg Investments
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.