How to Choose an Investment Approach: Opt for Either Cash Flow or Capital Gains

by | Feb 17, 2023 | Investing Advice

Even the most seasoned investors can become engrossed in economic updates and predictions about market trends, leading them to question which investment strategy would be most effective in the current landscape.

After addressing questions about risk, rates of return, and the workings of real estate syndications, the focus of an investor who has decided to invest in a real estate syndication deal naturally shifts to determining the optimal investment strategy. It becomes important to identify what to look for, what red flags to be aware of, and how to adjust your approach based on the current market cycle and economic conditions. As every year, market, and climate is different, it’s crucial to adapt your investing strategy accordingly, as change is the only constant in life. Understanding the two main strategies and their significance is key to making an informed decision, regardless of the state of the economy or the market.

Two Investing Strategies
The two most common and most widely discussed, overarching investment strategies are:

1) Gains Strategy
2) Cashflow Strategy

Both strategies are essential to the bigger picture, and you’ve got to be informed about each one and how it might affect your financial situation to strategize appropriately. A gains-focused investment strategy is focused on buying low and selling high, creating a gap of profit (gain) between the two transactions. Some great examples of this in residential properties are foreclosures and fix-and-flips. In real estate syndication properties, the business plan will give you details in alignment with buying undervalued property at a killer deal, executing light renovations, and selling at a much higher market price. This may or may not be a quick turnaround deal and the cashflow might be on the lighter side. On the other hand, in cashflow-focused strategies, you’d buy and hold for a long period of time with the expectation of constant distributions month after month. Rental properties with existing, faithful tenants like in large apartment complexes are great examples. There might be some natural appreciation in the deal, but the most attractive quality highlighted in the business plan is the predictable returns.

The Gains Plan
The caveat to pursuing gains only, is that you have to know the asset’s actual value and the market trajectory, almost guaranteeing you’re are getting a great deal on the buy.
In real estate, there’s a saying – “You make your money when you buy, not when you sell.” It means that you can’t rely on what you think the price should be, that you can’t rely on market appreciation, and that you definitely shouldn’t be expecting renovations to make the deal profitable. In other words, you must buy at a discount so that you can sell for a profit. The gains strategy also requires that you have a separate income to support your lifestyle and the asset throughout the time you own it. Assuming the property isn’t providing you any monthly income, you still have your own bills, transportation, and food to pay for, including mortgage, insurance, and any repairs that come up before you sell. A narrow focus on investing for gains comes with an inherent business risk since 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. One more thing, if your goal is to sell when the property appreciates 20%, you have to be disciplined enough to sell right then. Some investors get hung up when they decide to “just hold it another year, ‘cause the market’s skyrocketing right now” but things crash six months later.

The Cashflow Plan
Planning solely for cashflow is about 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 always have to assess sustainability over the longterm. Meaning, how sustainable is the profit each month? 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. Another consideration is, for example, with that same $100 in profit on a residential rental each month, what if the market contracts and you have a hard time finding a tenant? Lowering rental rates to fill the unit might make it so the property is no longer cashflowing. You have to know ahead of time how you’ll handle that and decide the rate of cashflow you require on a property so ownership is sustainable long-term.

A caveat to an only cashflow-focused investment plan can leave you blind to the long-term wealth-building potential of appreciation, especially if the cashflow is funding your lifestyle instead of being reinvested.

Why Not Both?
The beauty of the question, “What is the optimal investment strategy for me in today’s environment?” is that it does not have a binary answer. In fact, you can have the best of both worlds! By investing in real estate syndications that offer both steady passive cash flow and appreciation potential, you can benefit from both investment strategies simultaneously. There’s no need to limit yourself to cash-flowing properties with limited potential for long-term appreciation.

Don’t hamper your cashflow by investing in properties that are only focused on gains. Here at Village Capital Partners, we believe the best way to build wealth and freedom simultaneously is to invest in real estate syndications with cashflow and appreciation built into each deal.

Deciding Which Plan Is Best For You Right Now
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 focus. On the other hand, if cashflow would allow your spouse to ditch the corporate stress and fulfill dreams of being more present with the family, then a reliable, cashflow-focused syndication might bring you joy.
Before you choose a particular strategy, 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. With a clear plan for where you’re going, it will be much easier to determine which investment strategy is best for you. Only then will you know to invest real estate syndication deals aligned with the gains plan, the cashflow plan, or a mix of both.