Think for a bit about how you made an important decision for a large use of cash. A car. The college you attended. That big vacation. New home?
If you are like many, you probably had a checklist. For a home, it might have included a specific area, school district, commute, 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, you would not have settled for a one-bedroom high-rise condo, even with a great view.
It’s that kind of situation with real estate investing. You need to know WHY you’re investing and WHAT you’re looking to get out of it.
Without clear goals, you could stare at pretty pictures, pour over spreadsheets, read a ton of pitch decks and spend a ton of time looking at well-marketed opportunities that just don’t align with your investing goals.
As we walk through these examples of goals, see if one resonates with you. With clear goals in mind, you’ll know where to focus when the right investment opportunity comes along.
Investing Goal Example #1: Cash Flow
Let’s say you are single mom working a corporate job full-time. The income is great, but the meetings, commute, and other daily hassles aren’t worth your time away from the kids.
So, you’d like to create passive income of about $3,000 per month that will fully cover current living expenses, which would allow you to quit your job. Finding investments that will provide steady cash flow now would replace income and allow you to be fully present with the kids.
If you require $36,000 per year ($3,000 per month), you will need to invest roughly $450,000 if expected returns are in the 8% range.
$450,000 invested x 8% cash flow returns = $36,000 in passive income per year
With this knowledge and these numbers in mind, you 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 your attention.
Investing Goal Example #2: Appreciation
By contrast, what if you are single with no children, have excellent cash flow, aren’t interested in quitting your full-time job, and are more interested in potential appreciation.
Property values can have huge upswings, and you love the idea of investing in large coastal cities like New York and San Francisco. Yes, there is higher risk and a longer time to wait until payout, but it’s okay, since your current cash flow situation is strong.
Even if the investment doesn’t appreciate as much as expected, that’s okay….. you will take 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, be aware of the pros and cons, know that there are winners and losers in this game, and look for value-add deals in appreciating markets to increase your chance for high returns.
Investing Goal #3: Cash Flow AND Appreciation
If you didn’t really feel comfortable in either Goal #1 or Goal #2 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.
Know Your Goals
The investment summaries for real estate 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 invest with intention, without second-guessing yourself.
These three scenarios do not take into consideration income taxes. Since taxes are very individualized each person needs to consult with their own tax professional before making any decision about investing in real estate.
Prevail Innovative Real Estate Opportunities, LLC., (PREO) is affiliated with Prevail Wealth Advisors, LLC (Prevail IWA) and Prevail Strategies LLC., because they are under common ownership and control. PREO was formed to provide real estate investment opportunities for high-net worth investors looking for diversification. Prevail Wealth Advisors, LLC., is a federal registered investment advisor. Registration with any securities authority is not an endorsement of the services offered by the investment adviser. Fixed insurance products and services are offered through Prevail Strategies, LLC., a licensed insurance agency. Any investment by a Prevail IWA client into a PREO sponsored real estate investment would be without the involvement of Prevail IWA and should be not seen a s a recommendation by Prevail IWA. Additionally, Prevail IWA clients should realize that any capital they invest in a PREO-sponsored real estate investment would be completely outside of their advisory relationship with Prevail IWA and not part of their Prevail IWA account going forward. Finally, there are material differences between the type of investments PREO may offer and the investments on which Prevail IWA provides advice in terms of risk profile and liquidity, and the compensation PREO earns from a real estate project in which Prevail IWA clients invest may be materially different than the investment advisory fees Prevail IWA charges its clients.
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