May 10, 2022
As the life cycle of the DiversyFund Growth REIT continues into its fourth phase, cash-flowing, investors can see the results of the first phases going to work. Cash-flowing represents the idea of allowing a multifamily rental property to begin accumulating income and natural appreciation. This phase is critical for an REIT, as it marks the beginning of realizing each investment’s opportunity.
Cash-flowing can be broken down into two critical components: rent accumulation and appreciation. Each component is unique, but they both contribute to an asset’s overall performance in a REIT’s portfolio. Here’s a closer look at cash flowing, what goes into it, and what makes it so critical for an REIT’s success.
A key driver of income for an REIT’s portfolio is the accumulation of rents. Rental accumulation can also be referred to as income appreciation. Monthly rents provide a steady stream of revenue, which provide several benefits for the REIT, and successful assets can see increases in rents over time. This money can be used to reinvest in the property itself through value-add projects, renovations, and ongoing maintenance. It also provides a steady flow of revenue for the property and its investors. Assets with increased value through value-add projects, such as those described here, can see increased rents and potentially increased profits over time. Some properties may also see regular monthly income through additional means, such as payment for parking spaces and access to other onsite amenities. Rent accumulation continues throughout the life cycle of the REIT, until the assets are sold, providing regular and reliable income for its portfolio.
While rents and other forms of income are important to a REIT’s success, appreciation is just as essential for the cash flowing phase. Appreciation is the rate at which an asset (in this case, a multifamily rental property) grows in value over time. This increase in value can be due to a number of factors, including:
All of these factors contribute to natural appreciation, where the value of the property increases over time as a result of the current market conditions. However, appreciation isn’t only limited to market trends and conditions. The DiversyFund Growth REIT also uses a value-add implementation and renovation strategy to improve appreciation whenever possible. This is referred to as forced appreciation. Creating a more desirable property and community for residents to call home can lead to increased value in the asset. Time and renovations both contribute to appreciation, so it’s important to focus on strategic improvements and creating a long-term strategy before selling any asset.
So how does the cash-flowing phase benefit a REIT’s investors? Comparing REIT investing to the practice of real estate flipping can provide some keen insight. When an individual investor (or small group of investors) purchases a home to “flip” for a profit on the market, they must take on the expense of purchase and renovation with no opportunity to generate revenue before reselling the property. A REIT invests in multifamily assets and allows time for rent collection in the cash-flowing phase. This means that revenue and profits continue throughout the life cycle instead of only generating a profit at the time of sale.
The cash-flowing process is essential for providing REIT investors with a long-term strategy to build wealth, while flipping houses individually can create significant costs for the investor while waiting for a home to sell. Of course, cash flowing is just one essential part of the life cycle of a REIT. In our next blog, we will cover the liquidation phase and how it provides benefits for investors. You can read about the other steps in our previous blog posts, which can be found here.