Did you know that 82% of small businesses fail due to poor cash flow management (according to a US Bank Study)?
For any business endeavor, you must have a positive cash flow to be sustainable. It’s as simple as that.
The same rule applies to investing. Cash flow is king for investors.
If you have cash flow problems, you’re more vulnerable to market cycles. Especially during a correction, when preserving your wealth becomes even more challenging, it’s best to have the protection afforded by dependable passive revenue.
Simply put, investors must put themselves in positions of strength. It’s how you eliminate emotions and make rational, data-driven decisions. Cash flow helps you do that.
That’s why multi-family investments are often a path to consistent income. One of the best income-generating assets, multi-family properties have a place in any investor’s portfolio.
Here are a few reasons why cash flows are so critical to profitable investing, and how multi-family investments can deliver consistent cash flows.
Cash flow means you won’t have to sell at the wrong time
You’ve probably heard that ‘cash is king’. This is why many people who win the lottery, when presented with a lump sum payment or a lifetime annuity, opt for the former. But at the end of the day, it’s cash flow that you really want:
“Cash flow is actually king and more important than just having cash. A lot of people in the last market cycle liquidated investments and were sitting on cash. But that didn’t solve the problem of needing to still generate cash flow,” states Don Wenner, President of DLP Capital Partners.
Consistent cash flow removes the need to sell at the wrong time or when values are low. It keeps you from having to take a loss because you need the money.
“When you have cash flow, you’re not as worried during downturns. You don’t need to sell in distress because you have cash flow. When you don’t have cash flow, downturns put in a bad place. Because you may need to sell in distress in order to get cash,” adds Wenner.
In the end, successful investing depends a lot on your ability to buy low, sell high. Cash flow gives you the leverage to stick to that plan.
Cash flow helps weather hard times
Remember the dotcom bubble? The Nasdaq index fell more than 76% from March 10, 2000 to October, 2002:
Source: BBC News and Bloomberg
A drop of this magnitude is hard to endure without free cash on hand. If you needed cash during this downturn, but weren’t getting it from your investments, you may have been forced to sell your stocks at a big loss. After all, cash flow keeps you prepared for the unexpected.
“Cash flow allows you to weather any hard times, whether it’s an economic recession or something in your business and personal life. Even if things are going well, having cash coming in enables you to prepare for hard times,” says Wenner.
If you don’t ever want to lose money, you can’t get trapped when a storm comes. Cash flow can shield you from that storm and empower you to wait for brighter days. As history shows, the economy is cyclical. And you don’t want to get caught buying at the top or selling at the bottom.
Cash flow creates massive long-term wealth
If you don’t need cash at the moment, generating cash flow still has value: you can reinvest your dividends and unleash the power of compound interest.
Look at the example below. It shows an initial $10,000 investment in a real estate investment trust (REIT). Over the course of 22 years (from 1994–2016), your portfolio would be nearly 5 times as large if you had simply reinvested your dividends. Even better, your investment would now produce much larger cash flow (if you wanted to start taking payouts).
Source: The Motley Fool
Of course, you can’t always reinvest dividends. Life happens. And money comes in handy.
Yet having cash flow through multi-family investments and other assets gives you flexibility. You can balance your decisions and protect yourself now while building long-term wealth
“When investing for cash flow through multi-family investments, you can do a combination of withdrawing and reinvesting. You can take the income you need and reinvest the rest to create greater wealth,” states Wenner.
Generate consistent cash flow in any economic environment with multi-family investments
To generate cash flow in any economic environment, you need a portfolio that emphasizes income-generating assets. This could be dividend-producing stocks, interest-paying bonds, high-yield savings accounts, private equity investing, real estate, etc.
However, not all cash flow investments are created equal. First, you should have reliable assets, such as multi-family investments.
Historically, multi-family property is not only one of the best real estate investments for cash flow, but it’s also one of the best cash flow investments overall.
For example, the DLP Preferred Returns Equity Fund offers quarterly dividend targets of 2% during the investment period (8% annual dividend), with remaining profits paid at redemption or wind-down. Few stocks pay out that amount in dividends. Additionally, stocks have higher volatility, which means your income can fluctuate greatly.
“At DLP Capital Partners, we focus our multi-family investment decisions around not risking principal and delivering consistent cash flow. Having a sizeable portion of your investments in income-generating assets gives you flexibility and freedom with the rest of your portfolio,” suggests Wenner.
Second, portfolios require diversification. Without diversification, your cash flow becomes less reliable and more inconsistent.
“If you have the same sort of multi-family investments within just one region, something like a natural disaster puts that investment at risk. When you have multi-family investments across a diverse geographical space, a diverse tenant base, and a diverse employer base, it creates consistency in that cash flow,” notes Wenner.
Finally, you should look for cash flow investments that hedge against equity risk, which bonds have long done. If you seek higher returns than bonds, the right real estate investment could serve as an alternative.
For instance, multi-family housing investments in good locations across secondary and tertiary markets offer protection during a downturn (large coastal markets are more at risk). Moreover, class B multi-family housing tends to have higher occupancy than luxury units, especially when consumers tighten their wallets and cut back on housing expenses.
How to best leverage multi-family investments
How do you invest for cash flow through multi-family real estate? Great question.
You could invest directly in properties and manage them yourself. However, this strategy may lack diversification and requires far too much work.
To succeed through the next economic cycle, consider a multi-family investment fund. The best funds are designed to provide consistent cash flow for investors throughout market cycles.
At DLP Capital Partners, investors benefit from a multifaceted, cash flow-oriented strategy that delivers consistent, high returns in any market:
- Investing in affordable workforce housing. On average, these multi-family investments have produced a 10% cash-on-cash return. This is income paid by thousands of residents every month.
- Buying value add assets. DLP buys properties that generate cash flow today, while focusing on improving that cash flow through strategies like property updates.
- Putting investors first. After expenses, DLP investors get paid first, even before DLP earns its management fee.
- Diversification of properties. DLP’s portfolio includes thousands of apartments across the US, in 15+ states with a focus on the south east.
Multi-family real estate investments, like DLP Capital Partners’ funds, provide consistent cash flow not only because they’re designed to produce income, but also because they generate high returns, hedge against volatility, and allow you to push through tough times with the economy.
If you’d like to learn more about multi-family investment opportunities, we’re here to help.