What is Your Investment Strategy - Cashflow or Capital Gain?
It seems now more than ever; we are getting caught up in economic news. Where is the market is going, and what will be the best strategy in today's environment?" The swings in the stock market, and yes now the Crypto market, are a volatile ride. While real estate is more commonly a stable asset, home prices and cap rates move, and we wonder how far they will move.
In syndications, it is not only is THIS the right syndication to invest in but is it the right time to invest in syndications period. When a deal is appropriately evaluated, then it is always the right time. But before you decide on the syndication, decide on your strategy, and ultimately your goals from that investment.
Ultimately we weigh two overarching strategies against each other. It can be one, the other, or maybe some combination of the two. Those two strategies?
Capital Gain Strategy
Cash Flow Strategy
Both strategies are essential to the bigger picture, and you've got to be informed about each one and how it might affect your financial situation to strategize appropriately.
A gains-focused investment strategy focuses on buying low and selling high, creating a profit gap (gain) between the two transactions. Some great examples of this in residential properties are foreclosures and fix-and-flips.
In real estate syndication properties, the business plan may give you details such as buying an undervalued property at a low-cost basis, executing light renovations, and selling at a much higher market price. There may be no cash flow during this repositioning, so you are banking on the upside.
On the other hand, in cash flow-focused strategies, you buy and hold for an extended period with the expectation of constant distributions month after month. 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 appealing quality highlighted in the business plan is the predictable returns.
The Capital Gains Plan
The caveat to pursuing gains is that you have to know the asset'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." In other words, you must buy at a discount so that you can sell for a profit.
The Capital gains strategy also requires a separate income to support your lifestyle and the asset throughout the time you own it. Assuming the property isn't providing you any monthly payment, you still have your bills, transportation, and food to pay for, including mortgage, insurance, and any repairs that come up before you sell.
A narrow focus on investing for gains comes with an inherent business risk since 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.
One more thing, if your goal is to sell when the property appreciates 20%, you have to be disciplined enough to sell right then. In stocks, it is your "Strike Price." Some investors get hung up when they decide to "just hold it another year, 'cause 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 cash-flowing 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 sustainability over the long term. Meaning, how sustainable is the profit each month? If you've got $100 after the mortgage and insurance are paid, fantastic, and yes, the property is cash-flowing. But what happens when you have to replace the water heater for $800? That means for eight months; you have $0 in profit. So you have to assess if the profit made after expenses each month is 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 residential 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 make it, so the property is no longer cash flowing. 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 an only cash flow-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.
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 binary. You can pick both!
You can earn steady passive cash flow AND enjoy the wealth-building power of appreciation by pursuing real estate investment syndications featuring both benefits at the same time.
Don't corner yourself into cash-flowing properties that have little to no long-term expected appreciation.
Don't hamper your cash flow by investing in properties that focus only on gains.
At Fortress Federation, 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 situation and your investing goals will determine what features you prefer in an investment opportunity. If you need $0 in cash flow now and are focused on building your retirement account that you won't touch for another 30 years, then aggressive appreciation-focused (gains) deals might be your focus. Keep in mind that your profit is only realized once it hits your bank account. For this reason, I look for deals that cash flow in year one.
If cash flow would allow your spouse to ditch the corporate stress and fulfill dreams of being more present with the family, then reliable, cashflow-focused syndication might bring you joy. Heck, what if it allows you to ditch the corporate stress?
Before choosing 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.
I look at it as the big nest egg at the end of the rainbow (capital appreciation) or lightening your monthly financial burden (by supplementing your income with cash flow).
With a clear plan for where you're going, it will be much easier to determine which investment strategy and which return structure is best for you. Only then will you know to invest in real estate syndication deals aligned with the capital gains, cash flow, or a combination of the two.