Take a moment to think about the process that 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 how many bedrooms you would like. If you were looking for a three-bedroom with plenty of green space in mind for your growing family, it's doubtful 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 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 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
Katie is a mom who works a corporate job full-time. While the 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 Katie 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, Katie should focus on cash flow first and foremost. That means discarding promptly any investments with lower projected cash flow returns and any opportunities reflecting 8% or higher should get her full attention.
Investing Goal Example #2: Investing for Appreciation
Meanwhile, Jesse 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 watches as property values have experienced huge upswings, and he loves the idea of investing in large coastal cities like New York and San Francisco. 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 robust.
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.
General investment advice is that these investments are riskier and that you should always invest for cash flow. However, there are investors with a higher risk tolerance who will voluntarily take on the risk for the possibility of appreciation.
In this case, Jesse 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 feel comfortable in either Katie's or Jesse'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 and 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
The investment summaries for real estate syndication opportunities attract your attention with pretty colors and beautiful photos, which is why it's essential to know your purpose for investing in the first place.
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.