I have suggested that real estate investors make a short term, intermediate, and long term plan for their investments, and update it regularly. By doing so, it keeps the investors focused on the long term goal, and not be sidetracked by issues that come up in the shorter term. Last week, I attended an investment class on investing in apartment buildings. I plan to start investing in apartment buildings later this year when I complete several other projects that I currently have pending. I am interested in apartment buildings for their cash flow. Because I now do not have a regular paycheck, I would like to create some more passive income from investments such as apartment buildings to improve my cash flow. The instructor pointed out what place investing in apartment buildings has in our real estate estate portfolio. It caused me to look at my investing plan in different, but related way.
The instructor said that our investment portfolio should be viewed as three different parts. I will call these parts A, B, and C.
Part A: Appreciating properties. These are properties bought strictly for it appreciation potential. These are typically single family homes which historically have appreciated more than any other properties. These properties are bought in high appreciating areas such as California, or Florida. The example give was if you owned $10 million in appreciating properties which is appreciating at a rate of 8% per year, that is $80,000 in equity gain thru appreciation each year. The downside to owning appreciating properties is that you will most likely have negative cashflow, very negative cashflow in many cases unless you put a significant of money down. However, it is long term appreciation of these properties that will make you wealthy in the long run.
Part B: Income Properties These properties, unlike appreciating properties have positive cash flow. The primary intent of these properties is to produce income. The best properties for the part b properties is apartment or commercial buildings which have the greatest income. Also included in this category is other multi unit properties such as fourplexes, duplexes, and even single family homes that can produce positive cashflow. Also included in this group are investments in private lending, loaning funds secured by real estate. Also investing in low tech business that produce superior cash on cash returns than other investments. An example would be investing in a business such as a gym, or a laundromat. Part B investments will not make us wealthy, but rich.
Part C: Cash Influx: Part C is investing activities that produce a cash influx. Such activities could be investing in rehabs, or foreclosures, or development. This part is most closely related to a “job”. You have to actively work at making these investments work, and when it does, you will an influx of cash that can be use to make investments in part A and B.
How each of these parts work together is that we work at our “job” to produce cash that is used buy Part A and B properties. Our main goal is to buy as much appreciating properties in Part A as possible as that will make us wealthy in the long run. We address the short term negative cash flow problems associated with these properties by using the positive cash flow from Part B investments to cover the negative cash flow of part A properties. We continue to work on the part C properties for additional cash influx, but as our income grows in the Part B investments, there is less of a need to work on the part C properties.
In reality, I am working on investments in each of these 3 areas all the time. As opportunities come up, I know what is the purpose of the investment, and how it fits in the big picture of my portfolio. This new way of looking at our investment portfolio has caused me to reevalutate my investment strategy, and portfolio. It appears that I have no real Part A or B type investments. What I have is more of a hybrid type of investments combining Part A and Part B investments. I have a portfolio of single family homes that cash flow, but not spectacularly. In terms of appreciation, its a mixed bag, a few have enjoyed great appreciation, but the majority has only had modest appreciation. I am heavily involved in Part C type of investments, 2 development deals, and a high end spec home. If successful, I will have a large cash influx which I plan to invest in apartment buildings to get greater cashflow. I am also becoming more involved in private lending, and looking at investing in several low tech business with some very attractive income returns. I really don’t have any pure appreciation type properties, as I had been avoiding this type of investments due to the negative cash flow, however I am looking at this area differently. As my cash influx and income increases, I plan to add more appreciation properties to my portfolio.
This expands on my suggestion to have a short and long term plan for your investments. This a slightly new way of looking at your investments, but it further reinforces the idea I suggested of looking at the pieces of your portfolio to see how it works in the big picture. So, years down the line, you still know the purpose of that investment, and we are not merely collecting properties. I am an investor in properties, not a collector. Collecting properties with no clear plan or direction will not advance your financial well being, but investing in specific properties with a clear vision of building long term wealth will keep your business and net worth going.
This new wrinkle to an old idea also illustrates the importance of continuing our education, and gaining knowledge. While I did learn a great deal about investing in apartment buildings, I also picked up several new investment ideas in addition to this one. It is important to keep learning, and have an open mind about new ideas, and learning from what others are doing. The great basketball coach Pat Riley once said:
“If you are not getting better, you are getting worse”
The same applies to our investment business.
