The First Question Investors Should Answer Before Investing

If you're just starting out in real estate investing there's a really simple way to quickly filter through real estate deals so you're staying focused on the deals that help you hit your goals in the most risk adjusted way.

And you’re going to do that by bunching real estate investments into 2 categories. 

and those categories are determined by where the bulk of your return comes from.

Those 2 categories are cash flow, and equity. 

When most people think of real estate investing they think of the cash flow aspect of it. Meaning every month rents come in, that rent pays down the expenses, and what’s left over is your return. 

We do expect a certain level of cash flow for every deal we do, but for most investors this actually makes up a very small percentage of the actual total return a deal should give you. 

In addition to your cash flow you should have a level of equity gain, meaning as the property increases in value, either naturally or through renovations, your ownership or equity in that property increases in value as well, and you see big returns when you sell or refinance the property. 

Cash Flow

Cash flow deals will pay you higher cash flow distributions, but your overall return will be much lower than an equity deal. 

The more return a deal gives in the form of cash flow the less risky that deal will generally be. 

Equity

A larger equity deal should see significantly higher return projections than a cash flow heavier deal, but with that also brings more risk. 

Examples

I’ll give you two examples. We just closed an apartment deal that is more equity heavy and we’re also managing a debt fund which is very cash flow focused. 

On the apartment deal we’re projecting a 20% average annual return over a 5 year period. The strategy with this property is we’re buying a dated apartment, renovating the units, increasing the rents, then selling it for a larger gain. 

We’re projecting anywhere from 3 - 7% cash flow annually paid out every month while we own the apartment building, but on the 5th year when we sell it we’re expecting a larger gain which would level out the returns to be 20% on average during the hold period. 

Opposite of that strategy we have a debt fund which are the highest cash flow opportunities right now on a risk adjusted basis

That debt fund projects to pay anywhere from 8 - 10% per year paid out monthly but with no sale on the back end. 

Some investors may like this better because it presents less risk than an equity deal, or because they’re living off their passive cash flow and they care more about consistent cash flow than a larger return down the road. You also see returns come in quicker since you’re not waiting for a renovation or sale to see the bulk of your returns.

Conclusion

One of the first things I tell prospective investors is they need to be able to answer the question of which deals they want to focus on and that will drastically reshape your portfolio. For us, we look for a balance of cash flow with equity gain but for others they may want to lean all in on one or the other.

If you’re interested in checking out the deals we’re investing in this year, make sure you book a call with us, make your way onto our investor list it’s the only way to guarantee you’ll get 100% of the deals we do this year. 

We’ll talk soon.