As a real estate investor, cash flow is the fuel that drives our businesses. Whatever means you use to purchase properties, it still doesn’t address the number one problem that causes businesses (real estate or other) to go out of business: lack of positive cash flow. Businesses depend on positive cash flow to keep functioning and paying their bills, vendors, and principals. In addition to the day to predictable day expenses that businesses incur, there are also those unexpected things that can pop up from time to time.
For rentals, there are things like furnaces, hot water heaters, plumbing, and other items that can break down, and tend to do so just when you least expect it! Another scenario is that you go a month or two without a tenant. Thus you have no rental income to pay the mortgage and other expenses for that period.
For fix and flips, sometimes you will find that there are some issues that were either missed or not readily apparent with the inspections, such as mold, foundation issues and the like. It is also possible that the project will take longer or cost more than you initially thought. Whatever the situation, you may need to dig into your business “pockets” and pull out some cash.
It’s no secret that it’s a smart idea to keep some money in reserve in your business to deal with these unexpected problems. The question is: How much money should one keep in reserve to be able to handle common issues and other than something catastrophic occurring and be able to sleep at night?
A generally accepted rule is to have between 3 to 6 months of operating capital in reserve. Unfortunately, many beginning, and often even experienced investors don’t have this kind of money put aside. It is vitally important to try as part of your goal setting, to build up this reserve as quickly as you can. We will talk later in this article about some strategies you might use if you do run low and don’t have the cash readily available. The secret is to have the money lined up before you need it!
Let’s first talk about some factors to consider when trying to pinpoint a sufficient reserve fund to keep your business running smoothly:
Depending on your real estate business strategies, the requirements vary a bit so let’s look at both rental and fix and flip cash needs
Other Factors to Consider for Rentals:
For Fix and Flips
– Buyers can back out of the deal or may not qualify for the loan.- You may run into additional problems with the property not evident with the initial inspection.- Flips often take longer and cost more than originally planned.
What to Do if You Run Low on Cash
A Few Final Tips
Make sure you keep constant track of your cash flow! If you have to tap into a line of credit or borrow the money, make sure you have a plan in place to pay it back! Also, it’s a good idea to pay the expenses that affect your credit first.
Always stay in touch and be honest with your creditors and vendors. If you run into a cash crunch, it is likely not the first time they have seen this situation and may have some good ideas and suggestions to help you out. It is possible that they may provide an extension. It is always advisable to have this situation handled in advance so that you know if the lender will provide an extension, what it will cost you additional and what the added impact will be on the terms of your loan.
Remember, even the most experienced of investors will run into a “hiccup” with their cash flow occasionally. It’s part of doing business! However, those that anticipate and plan for it will be those that will be the survivors. With a little preplanning and lining up cash beforehand, you will be prepared for most situations.
Here’s to your success!
President and founder of the Colorado Landlords Association, best-selling real estate author and attorney, landlord and real estate investor with 28 years' experience.