There are two kinds of investors in the world, and how you put your founder investment theory together is going to be geared towards one or the other. We are going to talk about investors who are primarily interested in cashflow, and those who are primarily interested in appreciation.
One of the components of your founder investment theory, that theory you’re putting behind your investments and portraying as a story to your investors or potential investors, is how it’s suitable for them. There are different kinds of investors out there: those who are primarily interested in cash flow, and those who are primarily interested in appreciation.
Let’s talk about cash flow investors first. Cash flow investors, as the name implies, are those interested in monthly or quarterly checks in the mail – “mailbox money,” as it were. They tend to be a group that either relies on that income coming in at regular intervals, or they’re planning to siphon it off to other investments over time. They may be getting that check in the mail, depositing it, and then putting it towards another syndication, stock, bond, or whatever it is. So those tend to be your cash flow investors.
In general, and this is extremely broad, so take it with a grain of salt (and it’s also not investment advice for anybody listening to this video), the cash flow investor tends to be your retired person because they don’t have a steady income coming in, so they are relying on that cash flow.
The other kind of investor out there is primarily looking for appreciation, so they don’t want a check now. You may ask yourself, why don’t they want a check every month or every quarter? Well, the big reason is taxes. These will be people who probably have a good paycheck and get paid regularly, and aren’t relying on your investment for that regular payment. What they are looking for is someplace to keep putting money away that will grow for them, and they don’t have to pay taxes on it while it’s in the investment.
A good example is a team of doctors investing in an office building. They aren’t really looking for any kind of regular income whatsoever; they’re looking to sell the property after a certain period and enjoy all the profits from it.
These are two totally separate tracks. I personally fall into the appreciation track. I make good money, I earn regularly, I don’t need to be paying taxes on a yearly basis. I’d much rather be putting that money away and watch it grow, then have a transaction that turns into a sale. Suddenly, I’ve got a nice bit of appreciation. Also, I’m not paying at that regular tax rate; I’m paying at the capital gains rate, not the annual rate, which is much higher.
That is a basic picture of what those two different types are. Now, certainly, there are people – and a large number of them – who want both. The point of this video really is not to say one or the other, or that your deal should be one or the other, because they’re all different. Every deal is unique and has its unique fingerprints. But what is critical for you to do is to identify what kind of investment it is because, depending on what it is, it’s going to change how you talk to your investors.
If it’s a cash flowing investment, you need to have that conversation with them, or they’re going to turn off instantly if they’re an appreciation person. And maybe that’s okay because if all they’re looking for is just appreciation, a cashflow deal probably isn’t right for them, or vice versa for the appreciation person who really needs regular money coming in.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. What we do is help real estate syndicators, developers, private equity funds, and businesses raise capital – raise that money they need to put into their business, their syndication, or whatever they’re raising money for. This is not only for the benefit of their investors but also for their own benefit. They make money this way. So we help make that whole process legal and compliant under the SEC rules.
If we can help you stay compliant under Rule 506b or Rule 506c of Regulation D, we’d love to talk with you. Give us a call. Our link is at the bottom of these notes.