The Importance of Cash Flow in Your Real Estate Business

By William Bronchick Real Estate Coach

Many businesses fail in their first year mainly due to poor cash flow management. According to a recent survey, the number one thing small business owners say they wish they’d have done differently was to have more startup money. Even experienced companies file bankruptcy, not because they don’t have a good business model but because they run out of cash. Consumers, too, don’t often manage their cash flow effectively and this can lead to foreclosures. True, the catalyst may have been an unexpected layoff, a change in the economy, a divorce, or some other crisis, but with sufficient cash reserves, consumers can overcome virtually any problem. The same principle applies to any business. Something can go wrong or business can become slow because of a down cycle, but so long as the business manages its cash flow, it will survive. Real estate investing is no exception. The reason most investors fail is that their plans and investment strategies don’t include effectively managing their cash flow. For example, let’s say an investor (we’ll call him John) buys a house as a rental property investment with no money down. If John has no cash reserves, what happens if he experiences a 20 percent vacancy rate—that is, he doesn’t rent the house for several months? What happens when there are repairs and unforeseen problems that may result in the need for thousands of dollars in repairs or improvements? John will have real problems if any of these events occur if his cash flow is low or nonexistent. Although I plan for repairs, vacancies, slow months, and a down market, I’ve had more than my share of unexpected cash crunch issues. For example, several times a local municipality made me pave a driveway, remove an abandoned car, or rebuild a fence. My insurance company made me re-concrete a long walkway because of what they considered safety issues. More than a dozen plumbing problems have caused major water damage to my properties—damage that was less than my insurance deductible. Every investor at some time gets blindsided by an unexpected repair cost, so be conservative when establishing your cash reserves. In essence, real estate investors are no different from average Americans who struggle to get by and live paycheck to paycheck, then suddenly get hit with an unexpected medical bill or car repair expense. The bottom can fall out from underneath quickly, so you’d be wise to set up a financial safety net. Having a Real Estate Mentor or Real Estate Coach can help you get the advice you need to make sure you manage your cash flow successfully.  

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