Investing Strategy - March 29, 2024

Cash Flowing Assets: What Self-Directed Investors Should Know

March 29, 2024

Soren Godbersen
By Soren Godbersen

What Are Cash Flowing Assets? 

Cash flowing assets, encompassing stocks, bonds, real estate, and money market funds, are foundational in generating regular income streams. A strategic and well-balanced investment portfolio typically integrates these assets alongside those that are growth-oriented, offering a blend of stability and potential. Particularly as an investor nears retirement, steady and positive cash flow are key to lasting success. This underlines why income-generating assets are integral to most investment strategies, balancing growth securities for a robust portfolio. As we will discuss, cash flowing assets are a hallmark of private-market real estate investing. 

Cash Flowing Assets, Defined

Cash flowing assets, also referred to as income generating assets, are investments that provide regular cash flow; in other words, returns in the form of cash flow instead of purely at exit.

Investors who prioritize cash flow, often referred to as income investors, make deliberate choices to include assets such as dividend-yielding stocks, bonds, and real estate. These selections are characterized by their ability to generate recurring cash, crucial for a stable investment approach.

For the discerning self-directed investor, the appeal of real estate as a cash flowing asset is multi-faceted. Properties not only provide potential rental income but also offer the possibility of value appreciation over time. This dual benefit positions real estate as a unique asset class, balancing immediate cash flow with long-term growth.

EquityMultiple’s Earn pillar focuses on cash flowing assets. However, Grow investments (predicated on real estate private equity) are typically structured to offer potential cash flow as well.

Cash Flowing Real Estate Assets in the Investor’s Portfolio

In the diverse world of investment, real estate assets have a unique standing. They tend to be less volatile compared to purely growth-oriented assets like stocks, making them an attractive choice for investors seeking stability and predictable cash flow. This is particularly relevant for self-directed investors using platforms like EquityMultiple, where the ability to select specific real estate investments aligns with the goal of crafting a tailored, income-focused portfolio.

Generally speaking, even growth-oriented real estate investments (e.g. those within EquityMultiple’s Grow pillar) target a cash flow component. This cash flow is typically derived from rental income at the property. While performance may vary, many equity real estate investments target higher cash flow than most dividend stocks. 

Real estate can provide compelling cash flow in any market. Presently we believe there is a once-in-a-cycle opportunity in real estate private credit. Given higher rates and tighter leverage, real estate debt investments may provide “equity like returns” and a uniquely compelling type of income generating investment.

— Soren Godbersen, Chief Growth Officer, EquityMultiple

Contrasting Cash Flow Assets and Capital Gains Investing

The realm of capital gains investing is marked by its speculative nature. Here, investors acquire shares with the anticipation of price escalations, aiming to capitalize on market timing. However, this strategy, while lucrative, bears significant risk due to market volatility. Conversely, cash flow investors gravitate towards assets offering steady and predictable returns. This could range from monthly to annual intervals, with a focus on predictability and consistency.

In the landscape of cash flow investments, dividend-producing stocks and real estate stand out. They offer the potential for long-term income, subject to their performance and maintenance. Unlike the short-term market fluctuations that heavily influence capital gains investing, cash flow investors can generally rely on their assets to provide steady income, with less need for constant market surveillance.

In practice, you may seek a blend of both cash flowing assets and growth-oriented investments. Diversifying across the real estate capital stack can bring investors a mix of cash flow and upside potential. 

The Ascent Income Fund offers an opportunity to tap into potential “equity-like returns” in real estate private credit.

Exploring the Types of Cash Flowing Assets

Cash flow comes in three primary forms: operating, financing, and investing. Operating cash flow stems from daily business transactions, emphasizing buying low to ensure profit margins. Financing cash flow relates to financial activities like issuing stocks or managing debts, focusing on balancing inflows and outflows. Investing cash flow is generated through the sale and purchase of long-term assets, both tangible and intangible.

Private-market real estate investing can potentially tap into all three forms. More niche asset classes like car washes may offer an investment thesis that includes operating cash flow. Real estate private credit opportunities are cash flowing assets that tap into financing cash flow. Real estate private equity and preferred equity investments tap into investing cash flow.

Cash Flow vs Appreciation

Cash flow, the lifeblood of any investment, refers to the net amount of money being transferred into and out of an investment over a specific period. In the context of real estate, it’s the profit realized from rental income after deducting all operational expenses, including mortgage payments, property management fees, maintenance, and taxes.

The Allure of Cash Flow

Investing for cash flow is akin to cultivating a garden that yields regular harvests. It offers a steady stream of passive income, enhancing financial security and providing a cushion against market volatility. This strategy is particularly appealing for those seeking to supplement their income or pave a path toward financial independence.

Pros:

  • Stable Income: Generates consistent, predictable income, offering a degree of financial predictability and peace of mind.
  • Risk Mitigation: Less susceptible to market fluctuations, providing a more stable investment option.
  • Equity Build-Up: Rental income can contribute to mortgage payments, gradually increasing the investor’s equity in the property.

Cons:

  • Active Management Required: Involves hands-on management or the need to hire a property manager.
  • Capital Intensive: Requires significant upfront investment and ongoing maintenance costs.
  • Market Dependency: Rental income can be influenced by local market conditions, affecting occupancy rates and rental prices.

To illustrate, consider a multifamily property in a growing urban area. With a strategic approach to property management and tenant selection, such an investment can provide a reliable source of monthly income. This income not only covers the property’s operational costs but also generates a surplus that contributes to the investor’s overall financial well-being.

The Appeal of Appreciation

Appreciation, on the other hand, is the increase in the property’s value over time. This strategy banks on the long-term growth potential of real estate, aiming to sell the property at a higher price than its purchase cost. Investing for appreciation is akin to planting a seedling, nurturing it, and watching it grow into a towering tree. It’s a play on future potential, often requiring patience and a keen eye for market trends.

Pros:

  • Significant Return Potential: Offers the possibility of substantial returns if the property’s value increases markedly.
  • Leverage: Allows investors to leverage their investment, using less of their own money to potentially earn more over time.
  • Tax Benefits: Potential for capital gains tax advantages, especially if the property is held for more than a year.

Cons:

  • Market Risk: Highly dependent on market conditions, with the risk of depreciation in adverse scenarios.
  • Illiquidity: Real estate is not a liquid asset, and selling a property for a profit can take time.
  • Opportunity Cost: The money tied up in a property awaiting appreciation could potentially be earning income elsewhere.

For example, an investor purchasing a distressed property in an emerging neighborhood stands to gain significantly as the area develops. Through renovations and improvements, the investor increases the property’s value, capitalizing on the neighborhood’s upward trajectory. This strategy, while riskier, can lead to substantial gains when the property is eventually sold.

For many investors, the optimal strategy doesn’t lie at the extremes but in a balanced approach that seeks to harness the benefits of both cash flow and appreciation. This might involve investing in properties that offer a steady rental yield while also situated in areas with strong growth potential. In many cases, core-plus or value add equity investments on the EquityMultiple platform will project to some degree of cash flow, with the majority of the return potential tied to appreciation. In other words, selling at an attractive exit valuation versus initial basis.

Diverse Cash Flowing Assets

The category of cash flowing assets is broad, covering dividend stocks, bonds, real estate, and various funds. Each type has its unique characteristics and benefits. For instance, real estate can offer direct income through rentals or indirect income via REITs and RELPs. Money market funds, CDs, and money market accounts, while offering lower yields, present minimal risk and are often backed by FDIC insurance. Annuities, available in fixed, variable, and indexed forms, promise regular payments over time, usually offered by insurance companies.

EquityMultiple’s Alpine Note provides an alternative cash flowing asset, backed by real estate. Notes offer 3 to 9 month terms, an APY to investors of up to 7.4%, and a minimum of just $5K.

The Role of Cash Flowing Assets in Portfolio Diversification

Diversification is key in managing investment risk, and cash flowing assets play a critical role in this. They help minimize the impact of market volatility, with options like mutual funds and REITs spreading risks across a range of assets. Alternative investments, including real estate trusts and syndications, also contribute to diversification, often being less correlated to general market movements.

Strategic Portfolio Allocation

Traditional portfolio models often suggest a mix of public stocks and fixed-income assets. However, incorporating a portion of alternative assets can offer a more balanced approach, less susceptible to short-term market shifts. Notably, platforms like EquityMultiple have made alternative investments (like real estate) more accessible, allowing a broader range of investors to diversify their portfolios effectively.

For more on strategic asset allocation, and how real estate can supplement or replace a more traditional portfolio allocation, please refer to this article

cash flowing assets: an example from real estate

Captiva Club Apartments, a cash flowing real estate investment from EquityMultiple

 

Investing for Cash Flow versus Growth

Investment strategies should align with an investor’s profile and long-term objectives. Younger investors might initially focus on growth strategies, gradually transitioning to cash flow-oriented investments as they near retirement. Real estate private credit and preferred equity investments may serve to supplement or diversify the cash flowing portion of an investor’s portfolio. 

Register now on EquityMultiple.com

Ideally, gains from the growth phase will facilitate substantial investments in income-generating assets for retirement. A diversified portfolio, combining income, growth, and alternative assets, can optimize returns while safeguarding investment capital against risks.

Cash Flow Investing Resources

As you plan your cash flow investing strategy for 2024 and beyond, refer to these resources to inform your asset allocation strategy. All are free for download.

Cash Flowing Assets — the Bottom Line

The traditional 60/40 portfolio may not offer as much cash flow as you want to supplement your income from salary, rental properties, or other sources. Diversifying across a host of cash flowing assets can help you better finance spending and liquidity for the ongoing development of your portfolio.

Cash flowing assets within private-market real estate potentially offer a viable route to generating steady income and achieving financial growth. For accredited investors, platforms like EquityMultiple provide a gateway to high-quality commercial real estate investments, marrying the advantages of cash flow with capital appreciation potential. By adopting a strategic approach and leveraging specialized platforms’ expertise, investors can fully realize the potential of cash flowing assets.

Cash Flowing Assets — FAQs

Q: What are cash flowing assets?
A: Cash flowing assets are investments that generate regular, predictable income. Examples include rental properties, dividend-paying stocks, and bonds.

Q: Why invest in real estate as a cash flowing asset?
A: Real estate investments offer steady income through rental payments and potential for capital appreciation. They also provide diversification and can act as an inflation hedge.

Q: How does EquityMultiple fit into cash flow investing?
A: EquityMultiple specializes in commercial real estate, offering accredited investors curated property investments. It focuses on assets with potential for both cash flow and capital appreciation, supported by comprehensive due diligence.

Q: What strategies can maximize cash flow from assets?
A: Effective strategies include choosing high-yield investments, leveraging tax benefits, and utilizing platforms like EquityMultiple for access to vetted opportunities. Diversification across and within asset classes can further enhance cash flow.

Q: How important is due diligence in cash flow investing?
A: Due diligence is crucial for assessing income potential and risk of an investment. It ensures the asset aligns with the investor’s goals and risk tolerance, leading to informed investment decisions.

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Soren Godbersen
Soren Godbersen
Soren is Chief Growth Officer at EquityMultiple. Since the launch of the EquityMultiple platform in 2015, he has overseen customer communications and educational content development. Soren is responsible for the ongoing development of the EquityMultiple brand, ensuring a great investor experience, and pursuing sustainable growth for the company. Mr. Godbersen holds a Bachelor's of Arts in Economics from Whitman College, and his writing has appeared in publications such as GlobeSt and the CFA Institute's Enterprising Investor. Prior to EquityMultiple, Mr. Godbersen worked on major product development and marketing initiatives for SaaS companies. He holds a degree in Economics from Whitman College.

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