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9 Tips To Prevent Cash Flow Problems Ahead Of Time
As you might already know, with any business, especially real estate, reality is very often some way off the ideal scenario in your mind.
A rental property generating positive cash flow and delivering a loss might be a preferred situation for a landlord, buy the real world don’t always turn out the way you want.
Cash flow can make or break your real estate business.
In fact, it can break any business. Just that real estating is more dependent on it compared to various other types of businesses.
Houses incur unexpected events that require significant expenses all the time.Even carefully crafted cash flow contingency plans might become redundant when unique event happen out of the blue.
But while you cannot run a landlording operation with complete certainty, there are some ways to prevent yourself from being too exposed to cash flow problems.
1) Maintain a cash reserve
This is such a timeless piece of wisdom that you really need to “wake up” if you have chosen not to heed this advice.
A lot of times, a lot of businesses close down not because they are not making money. But because they have cash flow problems.
A cash bottleneck can cause a business to have it’s life choked out of it. This is why many establishments frequently borrow working capital loans to keep their operations running… just so they have more time to collect their receivables.
You might be able to sweet talk your way past vendors and suppliers to get more credit terms. But try doing that to a bank who is chasing down the mortgage payments.
Don’t forget. If you are a multi-property owner, a month of vacancy can effectively write off all the profits made by as much as 5 rental properties.
Even late payments by tenants can cause cash flow problems. Because the mortgage due date is not going to wait for you to be ready.
These are the times, when you might have to dig into your cash reserves.
2) Quick collection, slow payment
As you can see from the previous point, the time taken for collections and payments can create a huge mess for your cash flow.
This also means that with good practice that leans in your favor, you can effectively streamline operations to keep the potential of cash flow problems at arms length.
Draw up business systems, protocols, and internal practices that encourage quick collection of receivables and delay payables.
You would of course don’t want to build a reputation in the industry as one who does not respect payment term agreements. So it is always best to negotiate for favorable terms from the start and get it down in writing.
On the flipside, you might actually build a reputation of someone who means serious business.
3) Don’t be rushed into acquisitions
Any real estate investor who has been in the game long enough would surely have had the experience of coming across deals where time is of the essence.
When there is little time to analyze data and run the numbers, this is when we can be prone to making rash purchases and suffer from regret later.
Meticulous research is essential to minimize the risks of buying a lemon. So never let pressure coax you into making a decision where you are not 100% comfortable with.
There are killer deals aplenty in the world of real estate.
For every seemingly attractive deal that you walk away from, another one will soon appear just around the corner.
4) Conduct property inspection
Most experienced property buyers will know the basics of home inspection. While many don’t see the skillset as necessary as they can always hire qualified property inspectors to do the job.
Whatever the case, always make property inspection as a condition for closing.
This give you leeway to wiggle out of a purchase should you discover certain problems that are too dire to fix.
Something to note is that when buying a house, always hire your own inspector to ensure that you obtain an independent report. If you leave the hiring to the seller, there is always a chance that the final report will favor the seller.
If you decide to save the money of not hiring a certified inspector and conduct your own inspection, which is not recommended, some of the critical areas to be more mindful of include heating systems, pest infestations, flooring, foundation, etc.
5) Perform regular maintenance
An apple a day keeps the doctors away.
The above saying is so true when it comes to landlording and property management.
Regular maintenance might appear to be annoying expense to pay. But if you look at the big picture, it is sure more economical compared to fixture replacements and overhauls.
Take note that the geographic area where the property is located plays a significant role to what types of maintenance are required and how they should be performed.
Some areas that should be frequently reviewed include the roof, heating and cooling systems, moisture in basement, insulation, etc.
6) Sell houses that turn out to be cash burners
Sometimes, even the most regular maintenance schedules will not “cure” a house no matter what you do.
For example, pest infestations can sometimes refuse to go away. Houses with structural problems can sometimes continue to pose problems even after being fixed, pipes can sometimes magically continue to leak even after extensive repairs.
If the costs of repairs and maintenance are getting to frequent to your liking, you should seriously consider selling it and moving on.
There is little point in keeping a house that is eating up it’s own the profits.
7) Be decisive in selling loss makers
Not every rental property you acquire will turn out to be home runs.
There will always be losers when you become an owner of multiple properties.
The gist is not to get emotionally attached to any one property. As soon as you realize that a specific house is not making money and will continue to lose money, be quick and decisive in cutting your losses.
Some might feel that it needs more time and are willing to give it another year even though the house has already been in the red cash flow territory for the last 12 months.
But why not sell it and with the sales proceeds, take your chances on another house or apartment?
If history is the only data you can use to gauge the future performance of a rental property, surely a history of a year’s worth of losses does not put it in good light?
Sometimes it’s not about you not willing to let it go. It could be that there are just no serious buyers interested in the place.
This is understandable. Just remember to take action when a fair offer is laid on the table.
8) Avoid properties that banks won’t finance
Conventional lenders, especially banks know their stuff inside out.
If the majority (or all) of them are not willing to finance a property, it is a clear sign that something is not right about it.
The obvious question is that if it is a good property, why would a profit-driven bank refuse to touch it?
Seller financing might be the trendy thing these days, but there might be reasons why that is the only option for buying a particular house.
Avoiding them altogether is the safest thing to do. If you must, conduct deep research to look for flaws.
Also consider that should you decide to sell the property in future, the prospective buyer might only be comfortable with conventional financing via a mortgage from a bank.
This can pose huge problems for the deal to go through.
9) Be flexible in your business strategy
Markets change, opportunities shift, and government policies alter.
When market conditions change, don’t stand still and let whatever will happen happen.
Be flexible in altering and switching your strategies to cater to the market. It is always to ride a wave rather than to fight it.
A big mistake that even veteran investors make is holding onto a loser that is bleeding cash based on the fact that it was once doing very well.
Don’t be a victim.