When we first get into real estate investing most of us think that we need to focus on the building itself or which strategy we want to use. In reality, I have found, the key to real estate investing is more about managing your money. Yes, you have to follow some basic rules regarding location and building quality etc. but for long term success you have to make sure you are keeping a sharp watch on the money.
What does that mean exactly? For starters you want to focus on cash flow and not growing your net worth. As I have mentioned before in other posts you can’t eat your buildings. To be asset rich but cash poor is not a lot of fun. You want to have strong positive cash flow with your rentals in good times so that you can still be positive (or at least break even) in bad times. Always be looking for ways to increase revenue and lower costs. Small amounts can add up to large numbers over time and the more buildings you have.
Stress test your purchases before you buy. What happens if you reduce rent or increase the mortgage interest rate or taxes go up 1%? Seeing how these different scenarios look on paper can save you a lot of grief in real life.
Ensure you have cash coming in when doing renovations or new construction; both to feed the project itself but also to ensure that you can eat and buy clothes for your kids. On these types of projects make sure that you are tight with draws. Make sure you get your draw requests in on time to your lender. Then make sure you pay your bills in a timely manner. Failure to focus on cash flow can stop a project cold as your trades refuse to continue working until they get paid.
Watch out for interest penalties and bank fees. Paying bills on time will also reduce the amount of interest you pay. Interest is just lost money and a lot of the time can be avoided. I always pay my visa balance in full every month. I pay my utility bills before the due date. If your trades offer 2% less if their bill is paid before a deadline try to meet those deadlines.
If you have a home equity loan of credit (Heloc). Use that to your advantage. Often the temptation is to spend up to the maximum limit – using the Heloc for deposits on new purchases or paying for materials on renovations. However, I would recommend always keeping a percentage of the Heloc unused. Save some money for a rainy day. Keep some powder dry, as they say, for emergencies or truly exceptional deals.
If you want to go hard and become a full time real estate investor, please make sure that one spouse is still working and bringing in ‘pay the bills money’. With no regular money coming in it is really easy to go upside down with the smallest problems. You get a couple of vacancies, you have some unexpected costs like a blown hot water tank, renovations take longer or cost more than you budgeted or the economy goes down a bit and you have to lower rents. These out-of-the-ordinary expenses can cause a lot of unwanted stress if you don’t have some savings to help weather the storm.
Paying close attention to how your money comes in and how it goes out is exceptionally important to your long term goals. While that may seem obvious I am continually amazed how often we can stray and get lazy as we focus on other parts of our investments. I am still guilty of this once in a while myself. It is easy to get distracted by more exciting parts of investing. Keep a sharp eye on your money and you will get to your goals a lot sooner.
Read more about this topic in Cash Management in Real Estate Investing.