Equity or Cash Flow: Which is More Important?
If you have reviewed an investment summary for a multifamily passive investment before then you will know that real estate provides returns in multiple ways. The two biggest of these returns is the cash flow that is disbursed ongoing and the equity which is disbursed at the time of sell or refinance. Many investors find themselves questioning which is the more important return metric. Today, we will discuss that the answer to this question is truly dependent on your needs as an investor.
What are your goals?
The first thing to clearly understand when you are investing is what are your goals. Of course, the overall goal of investing is to produce a return for your money, but people in different situations and life stages will have different needs as an investor. For example, a young professional who is investing retirement money in multifamily will care much more about the growth of that money overall and less about the ongoing cash flow that the investment produces. On the other hand, an investor who is close to retirement might be in need of an investment that will confidently produce higher cash flow in order to cover their living expenses. As you can see, having a grasp on the investment needs of your current life situation is important when determining what type of investment you will want.
How can you select the best investments for your goals?
Selecting an investment that fits your investment criteria may seem like a daunting task, but there are a few key principles that one can follow. First, equity rich investments tend to be shorter business plans (3-5 years) where appreciation is forced on a property followed by a sell shortly thereafter. The idea is to then reinvest that money in another property where it can continue to grow quickly. For a cash flow rich investment, the business plan will still typical contain a value add component, but the difference is that the property will then be held for a longer period of time (5+ years) to provide its investors with consistent long term cash flow but overall lower returns. All of the timing and results in either business plan are of course highly dependent on the market and current economic environment. One other option for investors who are only seeking high cash flow investments is to invest in a share of a multifamily investment that provides a high preferred return on the cash flow but no upside through equity. These types of deal structures have become more common in recent times and offer a great alternative for investors who need strong consistent cash flow but are not as concerned with overall returns.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.