By Joe Firmin 3-minute read
Think back. The last time you bought your current house…
You probably had a checklist that included must haves and nice-to-haves such as a specific area, school district, commute, and a specific number of bedrooms. If you were looking for a three-bedroom with plenty of green space in mind for your growing family, you probably didn’t even look at a one-bedroom high-rise condo with a sweet city 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.
IF YOU AIM AT NOTHING, YOU WILL HIT IT EVERY TIME.
Without clear goals, you’ll easily be swayed (or paralyzed) by great ad campaigns and well-marketed opportunities that don’t align with your investing goals.
I’m going to walk through a couple 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
Tom is a dad who works a corporate job full-time. While the income is great, the meetings, commute (or maybe not nowadays), and other daily hassles aren’t worth his time away from the fam.
So, he’d like to create passive income of about $5,000 per month that will fully cover his family’s current living expenses, which would give him the freedom to quit his job. Finding investments that will provide steady cash flow now would replace his income and allow him to be fully present for his family.
If Tom requires $60,000 per year ($5,000 per month), he would need to invest roughly $750,000 if expected returns are in the 8% range.
$750,000 invested x 8% cash flow returns = $60,000 in passive income per year
With this knowledge and these numbers in mind, Tom 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 grab his attention.
Investing Goal Example #2: Investing for Appreciation
Mark, meanwhile, is single with no children, has excellent cash flow (more money in than out each month), 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 cities like Atlanta and Tampa Bay. 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.
Even if his investment doesn’t appreciate as much as expected, that’s alright with him. He’s more stoked on the “chance” that it might and really hit it out of the park.
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, Mark 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.
Investing Goal Example #3 - The Hybrid: Investing for Cash Flow AND Appreciation
Like picking a flavor at an ice cream shop, maybe didn’t really want just ONE kind of ice cream, but TWO! So, if you didn’t feel super comfortable in either Tom’s or Mark’s shoes, that’s fine! 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 in the investment.
Know Your Goals
Investment summaries for real estate syndication opportunities are purposely made to attract your attention with bold facts, colors and perfect photos. This is exactly why it’s important to know your purpose for investing so you’ll crush it before you even start.
When a deal does come along that aligns with your goals, you’ll be able to confidently flip past the emotional juggernaut of colors and pictures, focus on the numbers, and pounce quickly, without second-guessing yourself.
If you’re interested in learning more about becoming a passive real estate investor, consider joining the Freedom Network. It’s absolutely free to join with no commitment necessary. If you don’t join, we won’t be able to send you opportunities (sorry, SEC rules). So join today!