Why It’s Crucial To Know Your Goals Before Investing In Real Estate Syndications
by | Jan 31, 2022
Take a minute to think about the process that you used to find the home you’re currently living in.
You likely had a checklist that may have included things like: a specific area, school district, commute, close proximity to a dog park and the number of bedrooms you were looking for. If you were looking for a three-bedroom with plenty of green space in mind for your growing family, and room for the dog to run around, it’s very unlikely 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 begin to consider potential investment opportunities, it’s imperative you 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 actually align with your investing goals.
As we walk through these examples, see if one connects deeply 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 job full-time for a growing company. 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 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 that any investments with lower projected cash flow returns should automatically be discarded, and any opportunities reflecting 8% or higher should really get her attention.
Investing Goal Example #2: Investing for Appreciation
Jesse, meanwhile, 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’s seen how property values have experienced huge upswings, and he loves the idea of investing in large coastal cities like Seattle, New York and San Francisco. He’s aware of the higher risk and the longer amount of time he’ll have to wait until payout, but he’s okay with that since his current cash flow situation is strong.
(As an aside, this is what the Jackson family did for decades. Invest in Seattle, taking advantage of appreciation. Knowing that the cash flow may come later.)
Even if Jesse’s investment doesn’t appreciate as much as expected, that’s alright with him. He’s more interested in the “chance” that it might.
Common investment advice is that these types of 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 really feel comfortable in either Katie’s or Jesse’s shoes, that’s okay! That just 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 in addition to 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.
(And this is where the Jackson family is now!)
Know Your Goals
The investment summaries for real estate syndication opportunities are purposely made to attract your attention with pretty colors and beautiful photos, which is exactly why it’s important 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.