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One of the primary objectives of real estate investors is to secure a return on their investment as a reward for making such investment, and taking the risks associated with it. It’s well known that investing in real estate and multifamily and/or BTR-SFR syndicated investments can be a generational wealth accumulator, but one of the key questions is whether investors should focus on cashflow or capital appreciation when making their investment.
This week we will take a look at these two options, some of the advantages and disadvantages of each strategy, and examine if it is possible to have the best of both worlds.
Multifamily syndications: investing cash flow
What is cashflow investing?
Cash flow investing in multifamily properties involves purchasing properties that generate positive cash flow from rental income after all expenses have been paid. In other words, the rent collected from tenants should be sufficient to cover all operating expenses, including mortgage payments, property taxes, insurance, repairs and maintenance, and still leave some extra money as profit as a return on investment.
What are some advantages of cashflow investing?
One of the primary benefits of cash flow investing is that it provides a steady and predictable income stream, which can be used to cover personal expenses, reinvest in additional properties, or pay down debt. This can be particularly appealing to retirees or those looking for a stable income source that is not tied to the stock market or other volatile investments.
Another advantage of cash flow investing is that it can help mitigate the risk of market downturns or unexpected expenses. Even if property values decrease or repairs are needed, as long as the property is generating enough rental income to cover expenses, the investor should be able to weather the storm without losing money.
What are some drawbacks of cashflow investing?
Cashflow investing also has some potential drawbacks. One challenge is finding properties that generate positive cash flow. In many markets, especially those with high property values, it can be difficult to find properties that produce enough rental income to cover expenses whilst still providing a reasonable return on investment.
Another challenge is that cash flow investing may not offer as much potential for long-term wealth creation as appreciation investing. Whilst steady rental income is certainly valuable, it may not provide the same level of returns as a property that increases in value over time.
Multifamily syndications: investing for appreciation
Appreciation investing in multifamily properties involves purchasing properties with the expectation that their value will increase over time. In other words, investors are looking for properties that will appreciate in value, allowing them to sell the property for more than they paid for it and generate a profit.
What are some advantages of appreciation investing?
One of the primary benefits of appreciation investing is that it offers the potential for significant long-term wealth creation. If an investor can successfully identify properties that are likely to appreciate in value, they can generate a substantial return on investment when they sell the property.
Another advantage of appreciation investing is that it can be easier to find properties that meet the criteria for this type of investment. In many markets, especially those with high demand and limited supply, property values are likely to increase over time due to supply and demand imbalances.
What are some drawbacks of appreciation investing?
However, appreciation investing also has some potential drawbacks. One challenge is that it is more speculative than cash flow investing. Whilst there are certainly ways to identify properties that are likely to appreciate in value, there is always a risk that the market will not behave as expected, leading to lower returns or even losses.
Another challenge is that appreciation investing may not provide a steady income stream. In fact, many properties that appreciate in value may not generate positive cashflow initially, as rental income may not be sufficient to cover all expenses. This means that investors may need to have additional sources of income or be willing to wait for the property to appreciate in value before selling.
Can you have both cashflow and appreciation from multifamily investing?
Whilst cashflow investing and appreciation investing may seem like two mutually exclusive strategies, it is possible to have both. In fact, many successful multifamily investors use a combination of both strategies to achieve their investment goals.
One way to achieve both cash flow and appreciation is to purchase properties that generate positive cash flow initially but also have the potential to appreciate in value over time. This may involve purchasing properties in up-and-coming neighborhoods or investing in properties that have value-add potential.
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In the view of CPI Capital both cashflow and appreciation strategies have their merits, although cashflow investing tends to be a more reliable and consistent approach that can provide greater stability for investors.
On the other hand, appreciation investing focuses on generating profits through the appreciation of the property’s value over time. Whilst CPI Capital understands this can result in larger returns in the long run, it is a more speculative approach that is subject to market fluctuations and requires a longer holding period.
Overall, cash flow investing can be a more conservative and dependable strategy for investors in multifamily syndications.
CIO, Co-Founder CPI Capital