Cash flow or Gains: How To Decide On An Investment Strategy
It happens to the best of us — we get caught up in economic news, assumptions about where the market is going, and we can’t help but wonder, “What’s the best investment strategy in today’s environment?”
Once you decide you’re going to invest in a real estate syndication deal, and you work through questions about risk, rates of return, and how real estate syndications work, your concern naturally pivots toward what investment strategy is best.
You want to know what to look for, what is a “red flag”, and what you should or shouldn’t do based on the current market cycle and the most recent economic conditions. This year the market climate is different than any other so your investing strategy should compensate you for that, right?
Well, the only constant in life is change. The most 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 what the economy and the market are doing.
Two Investing Strategies
The two most common and most widely discussed, overarching investment strategies are:
- Gains Strategy
2. 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 in order to strategize appropriately.
A gains-focused investment strategy is focused on buying low and selling high, creating a gap of profit (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. This may or may not be a quick turnaround deal and the cash flow might be on the lighter side.
On the other hand, in cash flow focused strategies, you buy and hold for a longer period of time 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 attractive quality highlighted in the business plan is the predictable returns.
The Gains Plan
The caveat to pursuing gains only, 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.”
It means that you can’t rely on what you think the price should be, that you can’t rely on market appreciation, and that you definitely shouldn’t be expecting renovations to make the deal profitable. In other words, you must buy at a discount so that you can sell for a profit.
The gains strategy also requires that you have 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 income, you still have your own 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. 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 profit leftover.
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 is paid, awesome, and yes, the property is cash-flowing. But what happens when you have to replace the hot 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 really 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 absolutely 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 are only focused on gains.
Here at LisaHylton.com, 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 personal 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.
On the other hand, if cash flow would allow your spouse to ditch the corporate stress and fulfill dreams of being more present with the family, then a reliable, cashflow-focused syndication might bring you joy.
Before you choose 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.
With a clear plan for where you’re going, it will be much easier to determine which investment strategy is best for you. Only then will you know to invest real estate syndication deals aligned with the gains plan, the cash flow plan, or a mix of both.
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About the Author
Lisa is the CEO of Lisahylton.com, a real estate company that helps entrepreneurs invest in tax-efficient real estate investments. At Lisahylton.com, Lisa and her team focus on buying apartments with investors and shares the profits. This strategy enables her investors to build wealth and passive income through investing in conservative, high-quality multifamily assets.
Lisa is the host of the Level Up REI podcast where she interviews real estate investors, entrepreneurs, and business owners to share their stories and experiences building businesses and investing in real estate. After a decade of working in the financial services industry, Lisa found investing passively in real estate syndications and was intrigued by the business opportunity to invest in real estate while also providing the opportunity to others to do the same along with her.
You can learn more about passively investing in high-quality multifamily assets that provide cash flow and strong returns at www.LisaHylton.com.