- February 23, 2021
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
Take a moment to think about the process you used to find the home you’re currently living in.
You likely had a checklist 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 improbable you would have settled for a one-bedroom high-rise condo, even 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, you must know WHY you’re investing and WHAT you’re looking 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 actually 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
Carolyn is a mom who works a corporate job full-time. While the steady income is great, the meetings, commute, and other daily hassles aren’t worth her time away from the kids.
So, she’d like to create a passive income of about $2,000 per month that will fully cover her family’s current living expenses, which would give her the freedom to quit her job. Finding investments that will provide steady cash flow now would replace her income and allow her to be fully present with her children.
If Carolyn requires $24,000 per year ($2,000 per month), she would need to invest roughly $300,000 if expected returns are in the 8% range.
$300,000 invested x 8% cash flow returns = $24,000 in passive income per year
With this knowledge and these numbers in mind, Carolyn 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 her attention.
Investing Goal Example #2: Investing for Appreciation
Matt, meanwhile, is single with no children, has excellent cash flow, isn’t necessarily interested in quitting his full-time job, and is more interested in potential appreciation.
He has seen how property values have experienced huge upswings, and he loves the idea of investing in high-growth areas such as Dallas and Atlanta. He’s aware of the higher risk and the more extended amount of time he’ll have to wait until payout, but 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.
Standard investment advice is that these investments are riskier, and you should always invest for cash flow. However, investors with higher risk tolerance will voluntarily take on the risk for the possibility of appreciation.
In this case, Matt 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 Carolyn’s or Matt’s shoes, that’s okay! That means you’re among the majority and that you’d like a mix of cash flow AND appreciation.
Hybrid investments that provide some cash flow throughout the project in addition to the potential for appreciation do exist! Don’t be afraid to seek that sweet spot – where you get ongoing cash flow to cover living expenses, plus the potential for appreciation later on in the project.
Know Your Goals, Stay on Course
We have seen quite a few investment summaries during our time as syndicators. As the saying goes, “Don’t judge a book by its cover.” It is easy to think that the deal and the team must be solid because the presentation looks so well put together.
That’s why it’s so important to know what you’re investing for, so you see beyond the beautiful photos & graphics and scrutinize the essence of the investment opportunity to determine whether it fits your investing goals.
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 pounce quickly, without second-guessing yourself.
If you’re interested in receiving future investment opportunities in your inbox, we invite you to join the Sage Investor Circle and to set-up a call with us so we can get to know you and your investing goals better!