Uncover the Cash Flow Strategy
For a new investor, putting their hard-earned capital into their first passive investment can be intimidating. Identifying the right investment strategy will have the greatest impact on your investment success. It’s important to establish which asset class aligns with your investment goals and risk tolerance. With the right approach, you can achieve the desired returns and grow your wealth over time.
Why Invest for Cash Flow
If you’re looking to achieve financial freedom, passive income, and early retirement, an effective strategy is to prioritize cash flow. A steady cash flow can help you reach your financial goals faster and build wealth over time.
How Does a Limited Partner Make a Return?
Investors in Multifamily Syndications can expect to receive a return on their investment through a combination of monthly cash flow in distributions, equity shares, and profits from the sale of the asset. However, property appreciation and rental income are the primary drivers of returns for both the Sponsor and the Limited Partners in a real estate syndication.
Understanding Cash Flow
An investment property operates much like a traditional business. The property generates income through rent payments and incurs expenses such as maintenance and repairs. To determine the net operating cash flow, you’ll need to subtract your operating expenses from your monthly revenue. This calculation will give you a clear understanding of your cash flow and overall profitability as a property owner.
How to Evaluate Cash on Cash Returns
As real estate investors we have a lot of metrics to choose from when analyzing properties To evaluate deals based on cash flow, use the debt service coverage ratio (DSCR). This will help you determine if a property will be cash-flow positive. DSCR is a metric that compares a company’s cash flow against its debt obligations. To calculate your DSCR, you’ll need to know your net operating income (NOI) as well as the amount of debt service on the property.
| Net Operating Income: Gross income minus operating expenses
Debt-Service: Cash needed to pay the required principal and interest of a loan during a given period |
Underwriting for Positive Cash Flow
When Viking Capital underwrites its deals we look for stable fixed debt and positive leverage. We heavily way the location in decision-making as well. We pick deals that are in areas that have landlord-friendly laws so tenants who are not paying can be evicted. And find properties in the path of progress where the economic fundamentals of population and economic growth are evident.
Another key factor for underwriting is, to track the broader real estate market cycle to strategically time when we acquire and dispose of properties to create the strongest returns and asset value.
Lastly, our acquisition team doesn’t rely on heavily financially engineered property assumptions such as bad debt, loss to lease, and vacancy. To take a deeper look at our acquisition process and learn about the underwriting process take a look at How Underwriting Supercharges Investor Returns.
What is the Downside to The Cash Flow Strategy?
Cash flow depends on market performance and tenant quality. Ultimately, if the economy in the location of the property isn’t able to withstand an economic downturn or experiences a high rate of vacancies, the cash flow will be negatively impacted.
Additionally, as an investor, if you are solely focused on cash flow, your intent is to invest for cash today but you could be compromising your overall return.
For example, Viking Capital offers three investment classes to its investors who all value different structures based on their investment needs. Investment priorities include a higher cash flow, a higher overall return, and enhanced economics based on investing a larger amount into the deal. Below is an example of the current Viking Capital deal’s class structures:
Final Thoughts
The questions each investor should ask themselves are; What is my time horizon? How important is the cash flow for my immediate needs? And what is my risk threshold? This trifecta of insights helps determine which type of investment strategy is best to accomplish your goal.
As a Limited Partner, your answer will be either to focus on your overall return on investment (ROI) or that monthly distributions are more valuable in your current situation and overall portfolio success.
