Whether you’re a new or seasoned real estate syndication investor, you might catch yourself thinking about the market cycles, the economy, and recent news events and wondering, “What’s the best investment strategy in today’s environment?”
As a new investor, once you decide you’re going to invest in a real estate syndication deal, and we’ve worked past the questions about risk, rates of return, and what to expect, your questions naturally pivot toward strategy and what you should do, look for, or avoid based on today’s market conditions.
For seasoned investors, this question creeps up repeatedly over time, often when faced with a meaningful life or financial change. It’s possible to initially invest in real estate syndications for gains but adjust toward a cashflow strategy when faced with potential college tuition bills for your kiddo within the next few years. It’s also possible to initially invest for cashflow and decide to adjust toward doubling your retirement account with gains-focused real estate syndication deals.
The only constant in life is change, so the 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 how complicated your family life, the economy, or market conditions get!
The Two Most Common Investing Strategies
Most real estate syndication investors are after one of two things, either cashflow or gains. Both are essential pieces of the puzzle, and you’ve got to know about each one and the role it plays toward your investing goals to strategize appropriately.
A gains-focused investment strategy is focused on buying low and selling high, creating gain (or profit) between the purchase price and sale price. Foreclosures and fix-and-flips are often aligned with the gains plan because you’re trying to snag undervalued property at a killer deal, do some light renovations, and sell at a much higher market price.
On the other hand, the cashflow plan is where you’d buy and hold with the expectation of constant distributions month after month. Rental properties with existing, faithful tenants are a great example of this. There might be some natural appreciation in the deal, but the most attractive quality for cashflow-centered investors is the predictable returns.
The Gains Strategy
The caveat to the gains strategy is that you have to know the asset’s actual value so that you, without a doubt, are getting a great deal at the purchase.
In real estate, there’s a saying –
“You make your money when you buy, not when you sell.”
Maybe you’ve heard it before? Well, it means that you can’t rely on what you think the price should be, that you can’t rely on appreciation, and that you definitely shouldn’t be banking on renovations to magically make the property profitable. In other words, you must buy at a discount so that you can sell for a profit.
Along with the mandatory discount, the gains strategy requires that you have a separate income to support your lifestyle and the asset until its sale. Assuming the property isn’t providing you any monthly income, you still have your own bills, transportation, and food to pay for, including mortgage, management, and possibly renovations on the investment property.
A narrow focus on investing for gains comes with an inherent business risk since you have to cashflow everything until the dotted line is signed and the investment is sold. 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.
The Cashflow Strategy
Pursuing the cashflow strategy is about longevity and consistent monthly or quarterly distributions over the longterm. 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 must assess the sustainability of that cashflow. As an example, 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.
Along similar lines, you have to be able to adjust to a tight market and still be profitable while also understanding in detail the debt being used to finance the property. If you have to lower rent to get a tenant, can you still perform the needed maintenance and afford the mortgage?
Focusing solely on cash-flowing investment properties is a great strategy for the right investor, but go in blindly and you can make costly mistakes or miss out on the long-term wealth-building potential of appreciation.
Why Not Both?
Here’s the thing, no rule says you have to invest only for one or the other. In fact, it’s a great strategy to invest in both! You can have a steady passive income from the cashflow and enjoy the long-term wealth-building power of appreciation by pursuing real estate investment opportunities with both features at the same time.
Why corner yourself into cash-flowing properties that have little to no long-term expected appreciation?
Why hamper your cashflow by investing in properties that are only focused on gains?
Here at Goodegg, we believe the best way to build wealth and create time freedom simultaneously is to invest in real estate syndications with expected cashflow and appreciation built into each deal. Hence, you get the best of both worlds.
How To Decide Which Strategy Is Best For You
Ultimately your personal situation and your investing goals will determine what features you prefer in an investment opportunity. If you need $0 in cashflow 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 jam.
On the other hand, if you’re raising a family and some cashflow would allow one spouse to be home with the kids, then a cashflow-focused multifamily syndication might be your golden ticket.
Before you choose a particular strategy, I strongly suggest you 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.
When you have a clear expectation for where you’re going, it will be much easier to determine what financial support you’ll need to achieve those goals. Only then will you know to invest in the gains strategy, the cashflow strategy, or deals with a mix of both.