Invest on Purpose - What Matters Most,...Matters
by Christopher Levarek
“If you don’t know where you are going, any road will get you there.”
- Lewis Carroll
For one to be successful in anything, knowing their motivations or goals is the starting point. You’ve probably heard this mentioned in previous articles on this site, but it truly is critical to not only getting to the desired result but being happy with the entire process.
Investing in real estate is no different. Understanding what matters most to you the investor, matters. Do you prefer higher cashflow now so that you can leave your job? Or are you building legacy wealth for your family and future retirement whereby appreciation is just as important? Let’s look at two separate scenarios to explore this idea further and see which one resonates with you.
Meet Rachel : Investing for Cash Flow, Example # 1
Rachel works a full-time job in corporate America. She makes a great salary, enjoys her work but also is a full-time mother with two kids. Now that the kids have grown, both 5 and 8, she is looking to spend more time with her kids and not have to commute or be away as much.
She wants to create another stream of income or passive income to allow her to cover her expenses and even possibly leave her job. To do so, Rachel needs to find passive investments requiring little time on her part, as she already has a full schedule. She also needs to invest for cashflow, or invest for return on her capital coming from monthly income, ie. rental income. This will allow her to achieve a flow of income monthly or quarterly.
If Rachel invests $400,000 in real estate with a 6% return from cashflow in a passive real estate investment, she makes around $24,000 a year ($2000 per month).
$400,000 invested x 6% cash flow returns = $24,000 in passive income per year
With this information, Rachel can look for passive investment opportunities that hold 6% or higher cashflow returns to enable her to make $2000+ a month in income. What matters to Rachel is the income for today to be able to leave her job today, ie. cashflow returns.
Meet Victor : Investing for Appreciation, Example # 2
Victor is married without kids. His wife and him make decent salaries in the IT industry, both working in the Silicon Valley in California. He enjoys his job and has no interest in leaving it anytime soon.
For Victor, he understands that specific markets and properties are in appreciating faster then others. He knows that if he invests into appreciating markets, he can get a return from the appreciation. He also understands that adding value or renovations to real estate properties can increase the appreciation and enjoys these “value-add” types of investments for this reason.
He understands however that appreciation takes time. Renovating large apartment complexes to add value can take years and market appreciation does not happen overnight. This is fine with him as he understands the benefits of appreciation and the upside potential.
He enjoys investing into passive real estate syndications that offer great appreciation or upside potential. Victor understands also that with upside, there can be downside risk or the possibility of less then projected appreciation. He is comfortable with the risk however as he enjoys high returns and the high risk/reward aspect of the investment.
The Hybrid : Why Not Both
What if you could invest for both cash flow and appreciation? Perhaps you don’t find yourself in either example above but somewhere in between. That’s perfectly fine. In fact, the majority of investors are investing for cashflow AND appreciation in most real estate syndications.
These hybrid type investments offer not only a preferred return, cashflow to investors, but will offer a profit-from-sale return, sale of the property, coming from appreciation and the value-added to the property. Look for these type of opportunities that can offer both forms of returns if you are interested in the benefits from both.
In Final
The main thing to take away from this article is that, what matters to you matters most. Knowing your reasons for investing in the first place will allow you to choose an investment that directly allows you to realize your goals. I recommend not choosing an investment simply because it has high returns or simply because someone you know is doing it.
Do some introspective searching and find out really why you are investing. Then align with projects or people that are offering such investment opportunities matching that purpose. This will ensure you feel good about your decision and accelerate the journey towards your desired goals.