As a new real estate syndication investor or an experienced one, you may be considering the market cycle, the economy, and recent news events and wondering “What is my best strategy for investing in this environment?”
For a new investor, when you decide to invest in a real estate syndication deal, and after we’ve worked through your questions about risk, return, and what to expect, you naturally turn to what you should do, look for, and avoid based on our current market conditions.
Many experienced investors wonder this question over time, especially when going through a change in their lives or finances. The initial strategy of investing in real estate syndications may be to gain profits over time; however, adjusting to a cash flow strategy once you’re faced with college tuition expenses for your child within the next few years may make more sense. You can also invest initially to maximize cash flow, then adjust your strategy to leverage gains-oriented real estate syndication deals to double your retirement account.
As change is the only constant in life, it is important to understand the two basic strategies and why they are important. Then, no matter how complicated your life, the economy, or market conditions become, you will have the knowledge you need to make a sound decision!
Investing in the two most common strategies
Investors in real estate syndication are typically looking for either cash flow or gains. Each is a critical piece of the puzzle, and you need to know how each contributes to your investment goals so you can strategize effectively.
Cash flow focused investment strategies expect constant distributions from your investment month after month. A good example of this is a rental property that has existing, loyal tenants. It is possible that there will be some natural appreciation in the deal, but the most appealing aspect for cashflow-focused investors is the predictable returns.
Alternatively, a gains-oriented investment strategy attempts to create a profit (or gain) between the purchase price and the sale price by buying low and selling high. The gains plan can often be associated with foreclosures and fix-and-flips, since you are looking to snag a bargain on undervalued property, perform some light renovation and resell at an incredible profit.
The Cash Flow Strategy
In order to pursue a cash flow strategy, it is necessary to have a long-term track record and to distribute regularly monthly or quarterly. It is not about timing the market, buying low, or creating a big spread. An ideal cash-flowing investment has enough distributed each month to cover property costs like mortgages, insurance, renovations, and repairs, as well as some profit left over.
If a property is cash-flowing, you must evaluate how sustainable the cash flow is. For example, if you’ve got $100 after the mortgage and insurance is paid, great! – the property is cash-flowing. But what happens when you have to replace a hot water heater for $700? That means for seven months, you have $0 in profit. You have to determine if the profit made each month after expenses is really sustainable and if the investment property will still be profitable if it needs repairs.
Similarly, you must be able to deal with tight markets while still being profitable while understanding in detail the debt required to finance the property. Can you afford the monthly mortgage and the needed maintenance if the rent has to be lowered to get a tenant?
In the right situation, focusing solely on cash-flowing properties is a great strategy, but going in blindly could result in costly mistakes. It’s possible you could miss out on long-term appreciation that will help you build wealth.
The Capital Gains (Gains) Strategy
Using the gains strategy requires knowing the asset’s true value so that you are sure you are getting a great deal.
A common saying in real estate investing is, “You make your money when you buy, not when you sell.” This means that your purchase price is the main factor that determines your profit later on. You can’t rely on appreciation, and you definitely shouldn’t place your hopes in renovations to make a property lucrative. To put it another way, you must buy at a discount to be able to sell for profit.
In addition to the mandatory discount, your gains strategy requires you to have an additional income that supports your lifestyle and the assets until they are sold. Unless this investment property provides you with monthly earnings, you still have your own bills, transportation, and food to pay for, along with the mortgage, management, and renovations for the property.
If you choose to invest for gains, you are also taking an inherent business risk since you will have to cash flow everything you do until you sell the investment. The asset must be held and sustained through market dips, without a return from the investment until it can be sold for the profit you wish to achieve.
How About Both?
There is no rule that says you must invest in one or the other. It makes a lot of sense to invest in both! Real estate investment opportunities that feature both cash flow and appreciation can provide you with a steady passive income and long-term wealth-building potential.
Why invest in cash-flowing properties that have little to no long-term appreciation potential?
Why invest in properties that are only focused on the gains instead of helping your cash flow?
Here at Harbor Drive Holdings, we believe the best way to build wealth and time freedom at the same time is to invest in real estate syndications with expected cash flow and appreciation built into each deal. This way, you enjoy the benefits of both worlds.
Which Strategy Is Best For You?
An investment opportunity’s features are ultimately determined by the features you prefer and your investment goals. Those looking to build a retirement account they won’t touch for another 30 years might like appreciation (gains) deals that require no cash flow at all. Alternatively, if you’re raising a family and want one spouse to be home with the children, then a cashflow-focused multifamily investment might be the perfect solution.
I highly recommend that you consider what will be in your near and distant future before choosing a particular strategy and then explore how real estate syndications might support that vision. Ask yourself if anything monumental will happen within the next five years, such as graduations, weddings, daycare, schools, new cars, moves, additional education, or career changes.
You will be better able to determine the type of financial support you’ll need to achieve your goals when you have a clear expectation of where you’re going. By doing so you will know whether to invest in the gains strategy, the cash flow strategy, or deals that combine both.