Do you think that Cash Flow is the most important accounting activity for your real estate investment business?
In our humble opinion, we do feel that cash flow is the most important variable to have a grasp on.
The real estate business is a very cash intensive business. Now you may be saying, don't you use alternative forms of financing to fund the properties you want to acquire?
The short answer is yes, but you will be heart pressed to find lenders (private & hard money) that are willing to lend 100% of purchase, repairs & closing costs.
Also, if you are getting these properties financed (and you do not have money coming in monthly) and your delivery is rehab and sell, you better have the cash on hand to cover your interest payments to your lender (or that will be the last time you leverage with that entity or individual)
Real estate investment businesses should really understand that running out of money is one of the primary reasons that new businesses tend to fail.
So first off, you will need liquid capital (that is unless your primary strategy is wholesaling - less cash intensive). If you are thinking about starting a real estate investment business, based around buy & holds & flipping, you will need a good amount of liquid cash to execute your plan.
Let's just go through a quick example.
Purchase Price: $80,000
Rehab Cost: $50,000
ARV: $200,000
Your lender says that he will lend you 90% of the purchase and 90% of the rehab. This means that you will have to come up with 10% for the purchase and 10% for the rehab, along with the closing costs associated with the deal.
So how much cash would you have to bring to the table for a deal like this:
Purchase Price: $8,000
Rehab Cost: $5,000
Closing Costs: $2,400
Total: $15,400
So in order to properly finance this project, you will need to bring $10,240 and you will you need to have an extra $5,000 for the repair's on the project.
Now that we know how important cash is for your business, let's learn about some ways we can better manage it.
1) Focus On Cash Flow Management
It is far to easy to find yourself solely focused on the profits for a specific project. While the profit's are extremely important, how you manage & use the cash from those profits is more important. You need to have a close eye on what is coming in and going out. Reviewing these numbers once a month is not enough. You need to have a clear understanding of your cash position on a weekly basis.
2) Understand Your Lenders & Their Requirements
This is very important in determining how much cash you will need to have on hand to operate your business. In each and every one of our businesses, we have goals (we will touch on next) and our goals will determine how many properties we will purchase and how many properties we will purchase will determine how much cash need to reach our goals. I say that to say this, each one of our lenders will have different LTV requirements, origination fees and interest rates. This will determine how much available cash you will need when you use one of these lenders to fund a project.
3) Know Your Business Plan, Goals & How Many Properties You Want to Buy
At the beginning of every year, you should have goals established as to where you see your business when December 31st hits. These goals will determine how many properties you intend to purchase throughout those 12 months. By understanding how many properties you intend to purchase monthly & yearly and your lender's requirements you can estimate how much liquid cash you will need monthly to operate your business. For example: If you plan on buying 12 properties a year, or 1 property a month and you know that you will be required to come up with 10% of the purchase price + closing costs. You also know that your average acquisition is $50,000, then you have a pretty good understanding that you will need about $7,500 in liquid cash to purchase 1 property a month (the rehab was not calculated)
4) Maintain Cash Reserves
When you operate a business, you never truly know what the day will bring you. Especially when we are talking about potentially have to rehab properties. Tasks come up that we didn't see, producing change orders causing the business to spend money it didn't intend to. This means that you need to begin some cash reserves so that you have the funds when a huge opportunity persists or drawbacks happen.
5) Make Wholesaling Apart Of Your Business Plan
Why do we feel that wholesaling is so important to a successful real estate business? The reason is it because the receivables can be collected faster than a flip. When you flip a house (depending on your market) you may not see your money for 6 months. It is difficult to operate a business when your receivables are that drawn out (unless you are doing high volume & you have closings every month). One way to diversify and put some cash in your business is to implement wholesaling. Wholesaling will allow you to assign or sell properties to investors who will be purchasing these places in cash resulting in a 2-3 week receivable window and minimum cash upfront. Another way to bring cash into your business is through rental properties!
6) Create Beneficial Payable Terms (But Always Pay on Time)
In this business, you will always be working with subcontractors who will require payment for work that they have done. In some cases you will not be able structure payment in a manner besides paying when the work is finished. Typically you will be doing with smaller subcontractors who need the cash to make payroll for the week. However, in some cases you will be able to structure contracts that will be beneficial for the cash flow for your company. This can mean that you pay your general contractors on a bi-weekly basis or half of the job upfront and half when the job is complete. Determine what structure will work best to manage your cash flow and negotiate this structure upfront.
7) Know All Your Monthly Costs
How can you manage you cash flow if you do not have a firm understanding of what all your monthly costs are. Operating expenses are a very important piece of any business and they can spiral out of control if you do not pay close attention. So be sure to document all of your monthly spend on an income statement so you are aware of where your monthly expenses. This will also give you a better idea as to where your break even point is and allow you to set goals to forecast how much revenue you need to do monthly to produce be in a comfortable cash position.
Cash Flow is Important So Treat It That Way
We hope that you learned some valuable tips as to how to better manage your cash flow on a monthly and annual basis. In our business, cash is king and cash flow is the most important variable in our business model. We need to have the cash to operate our business and meet our goals as an organization. Make sure you have a great understanding of all of the numbers associated with your business. This will allow you to better manage your cash flow and purchase more properties in the long run.
In the comment section below, be sure to let us know some of the ways that you manage your cash flow.
HS Property Funds
Funds to Help, Problems to Solve
(315)516-8023
www.hspropertyfunds.com