We discuss the difference between investing for cash flow and investing for equity all the time. So which one is better? Before you decide, let’s discuss how equity investing differs from a cash flow strategy.
A cash flow investment strategy involves investing in a piece of real estate that generates cash and puts money in your pocket every month.
An equity investment strategy involves investing in a piece of real estate that you believe will go up in value over time so when you sell it, you will receive more money than you originally invested.
A quick way to determine how long it would take to double your money is to simply divide 72 by the annual percentage return you receive on your investment. For example, if have a piece of property that returns 10% every year, it would take approx 7.2 years to double your investment (72/10=7.2).
You can use this quick formula for equity investments as well. Let’s say your equity investment is targeted to double in value in 3 years, then the yearly return would be 24% (72/3=24).
This simple “rule” makes it easy to compare these two types of investments.
The numbers above are for example purposes only, but they are also loosely based on a simple truth – when you invest for equity and growth, you are often deferring cash flow (in many cases) for a potentially higher return in the future.
Pros and Cons
A common downside on equity deals is that you do not collect cash flow for several years. Your money goes into the deal and then comes out years later – hopefully in a larger amount. The Pro, however, is that you can typically get a higher return on your investment than you might otherwise if you were to invest for cash flow or monthly income.
Investing solely for cash flow and/or “steady income” may mean that you do not hold an equity position or have any “upside” in the deal. Again, you can think about the comparison to bonds vs stocks. A bond is “debt investing” you are not the owner of anything but an IOU. A stock is “equity investing” and you have a percentage of ownership in a company. In real estate, you could invest in private notes (debt investing) or you could invest in equity deals and have a percentage of ownership in the project. Now you might be thinking…why not have a mix of BOTH equity and cash flow? And that’s exactly the point!
The Sweet Spot is a strategy that seeks the best of both worlds by securing equity AND cash flow. This can be a single project or you can build your own customized portfolio where YOU have the ability to choose how much equity and how much cash flow you would like to have.
Direct Source Wealth seeks to invest in this “sweet spot” strategy with our investors. Yes, we have skin in the game and we co-invest alongside our investors in every deal, so we align our interests. We tend to look for properties (assets) that have a “value add” component where we can improve the project (resulting in equity increase) while also improving the cash flow structure as well through a rise in occupancy and improved marketing strategies. The best of both worlds! We also understand that return OF capital is perhaps more important than return ON capital. We are always seeking creative ways to get our investor’s original capital returned as soon as possible.
“Sweet Spot” projects are becoming more difficult to find at this stage in the market, so what do you do when a project like this is not available? Perhaps you could consider combining a note-lending opportunity (for cash flow) and a development project (for equity).
At Direct Source Wealth we focus on acquiring enough properties or “assets” so that our clients can achieve their desired passive cash flow level – whether that means $5,000 a month or $50,000 a month. At this point, you can achieve something we call “TIME Freedom” – The ability the spend more time doing the things you enjoy most in life while having the “option” to do the things you don’t enjoy as much.
We understand how complex real estate investing can be; that’s why we have assembled a team of experts to do the “heavy lifting” for you and to manage the day-to-day headaches that are associated with buying, selling and managing real estate. Many of the projects we invest in are “too big” for most individual investors, which is why we invest together as a group of like-minded individuals.
Direct Source Wealth offers a hands-off approach to real estate investing, so you have more time to spend vacationing, helping others or to build your dream lifestyle instead of stressing about your rental portfolio. It truly is the ultimate freedom when you have the ability to do what you want when you want as much as you want. What would you do if you could create more time every week?
The most important part is to have clear intentions about what you want to achieve, by devising an investment strategy to guide you forward.
If you’re not sure which strategy is best for you, don’t gamble with your financial future! Reach out to one of our Relationship Managers for a complimentary consultation.
Click HERE to learn more about our EQUITY project in Denver, CO.
(We’ve made an exclusive webinar for accredited investors only)