Think about the experience you had when you bought your current home.
It is improbable that you simply closed your eyes and pointed to a location on a map. More likely, you had specific criteria in mind, such as proximity to your workplace or school, access to desired amenities and shopping, and a predetermined number of bedrooms, bathrooms, and price range.
For example, if you were seeking a three-bedroom home near public transportation in the city, you would have likely rejected a one-bedroom condominium with a scenic view and rooftop patio in the suburbs. While the patio might have been idyllic, the cramped space would have been unsuitable for your family. Thus, you eliminated it from your list.
Similarly, before entering the real estate market as an investor, it is essential to establish clear investment goals to avoid being swayed by tempting but unsuitable investment opportunities or experiencing analysis paralysis.
Without specific objectives, you might succumb to investing in any property that appears attractive or be overwhelmed by the abundance of seemingly suitable options.
Real Estate Investment Goal Setting
After establishing your real estate investment objectives, you will possess a definite understanding of the criteria for a suitable investment. This clarity will enable you to evaluate the next investment opportunity and determine if it aligns with your goals.
To illustrate, consider some real estate investment goal examples that may resonate with you and your circumstances. By examining these goals, you can determine which ones align with your priorities.
Know Your Goals
Having clear financial goals is crucial for making investment decisions that align with your overall portfolio strategy and retirement plan. It’s easy to get distracted by the attractive visuals and imagery used in investment summaries for commercial real estate syndications, but having set investment goals will help you scrutinize the investment opportunity and determine if it fits your needs.
Once you have a clear idea of what you want to achieve, work backward to determine the amount you need to invest regularly to achieve your goals in a reasonable time horizon. It’s also a good idea to seek advice from someone who is already on a similar path and who you trust.
Some examples might include:
- Early retirement- FIRE
- College savings for children
- Build wealth for future generations
- Generate passive income for more cash flow
- Pay off debt, or your home more quickly
- Save for a major purchase
Investing Goal: Example 1- Investing for Cash Flow
Allow me to introduce you to Emily, a physician and mother. Although her job pays well, she is exhausted by the long hours and endless clinic hours.
Emily’s objective is to create income streams from commercial real estate that can cover her family’s living expenses, allowing her to quit her job in due course. In other words, Emily is pursuing cash flow investments that generate steady and immediate returns, rather than those that yield returns in the distant future. Her focus is on investments that will help to offset her current income, enabling her to eventually reduce her work hours.
Emily aims to generate $2,000 per month in cash flow distributions. She has found that numerous multifamily real estate syndications offer annual cash flow returns of eight to ten percent.
To achieve her desired $24,000 per year in cash flow, Emily would need to invest approximately $300,000, based on an eight percent return rate.
Consequently, Emily can easily disregard any investment opportunities that project a cash flow return rate of less than eight percent. Alternatively, she would be highly interested in any prospects that generate a cash flow return rate above ten percent.
Investing Goal: Example 2- Investing for Appreciation in Real Estate
Allow me to introduce Ricardo, whose investment objectives differ from Emily’s. Ricardo is not primarily interested in generating cash flow as he already has sufficient income from both active and passive sources.
Ricardo’s investment strategy revolves around market appreciation in the real estate industry. He has observed how coastal cities such as San Francisco and New York have experienced significant growth in real estate value, and he aims to benefit from this trend. Ricardo acknowledges that this investment approach comes with higher risks, but he is willing to accept them.
Ricardo is willing to wait longer for potentially larger returns rather than receiving immediate profits. He has multiple passive income streams and a substantial asset base, which allows him to assume more risk. Even if the appreciation falls short of his expectations, and he does not receive a high return, Ricardo is comfortable with his investment choice because he is investing for the opportunity of appreciation.
While many real estate investors advise against investing for appreciation and recommend prioritizing cash flow, there are investors like Ricardo with a higher risk tolerance who are willing to take the chance of investing for appreciation for the potential for a higher payout. However, investing for appreciation involves significant risk, and many investors have lost money while chasing appreciation.
Ricardo understands the risks involved and, therefore, searches for commercial real estate investments in appreciating markets, as well as value-add deals, to maximize his chances for appreciation.
Investing Goal: Example 3- Investing for Cash Flow and Appreciation
While Emily and Ricardo have clear investment goals, most real estate investors prefer a diversified portfolio that balances cash flow and appreciation. This strategy involves investing in properties that provide both ongoing cash flow and potential appreciation in an appreciating market.
These hybrid investments offer the best of both worlds, which is why they are a popular choice among many real estate investors, including ourselves. By setting realistic and strategic investment goals that prioritize cash flow for current expenses and appreciation for future gains, we can build a balanced and sustainable real estate portfolio.
Take a cue from Emily and start by sketching out your own investment goal-setting exercise. Consider how much monthly income from real estate investments would positively impact your current situation, as well as any specific goals you have for family vacations, net worth, or retirement age. With your investment goals clearly defined, you can confidently make investment decisions that align with your criteria when a suitable opportunity arises.
To learn more about retiring early through passive investing, watch our latest webinar, “From Fear to Fortune” with Founder, Vikram Raya.