ARE YOU WILLING TO ENDURE YOUR PERCEIVED WORST-CASE SCENARIO?
STEP 1
Decide Between Being an Active vs. Passive Investor
To decide between active and passive, you must evaluate your main source of income and how much capital you have to invest. For example, a successful doctor making $1,000,000 per year probably shouldn’t look to become an active investor because their time is much more valuable when focused on their main career.
In a similar example, if an investor has a $50,000,000 war chest, their time is best spent finding the most efficient and lucrative ways to allocate their capital. Conversely, if an investor only has $50,000 total to invest, spending lots of time trying to squeeze every last percentage point of return out of a small passive investment is not worth the time and effort. of monthly/annual cash flow. Other investors are solely concerned with total returns and therefore, do not make cash on cash metrics a priority. For these types of investors, development investments which are higher risk and don’t produce any cash flow may be a good fit. On the other end of the spectrum, retired investors living off their investment income are usually mostly cash-on-cash focused and therefore invest in existing assets which produce cash flow from day one of the acquisition. These types of investors also stay away from riskier investments since they rely on their investment income to live.
Determine Your Risk Tolerance
STEP 2
The next step is to evaluate your investment goals and tolerance for risk. The main distinctions between the types of investment strategies are between risk versus return and cash flow versus appreciation. The riskier a project is, the higher the potential returns. However, with greater risk comes a larger variation of outcomes. Are you willing to endure your perceived worst-case scenario? An element of risk versus return is the return profile of the investment. Investments with healthy cash flow are generally lower risk than investments which rely more on appreciation. In addition, investors should match their investment goals, such as a certain percentage or dollar amount
APPRECIATION STRATEGY
CASH FLOW STRATEGY
Pro: Higher returns Con: Higher risk
Pro: Lower risk, get cash now Con: Lower returns Good for existing assets and supplemental income
Good for development investments and ambitious investors
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