Real estate investors who don’t properly manage cash flows can suffer a variety of problems that may include not having enough money to pay operating costs, being forced to borrow on disadvantageous terms, not being able to refurbish and advertise vacant rental houses in a timely manner, and having to forgo attractive new investment opportunities. Fortunately, good cash-flow management practices can help investors avoid those problems and put cash to work in effective ways.
Here are some strategies to consider:
Get Profitable. Simply stated, profits generate cash while losses consume cash. That means investors need to focus on both profitability and cash flow. Increasing revenues and decreasing expenses consistently over time to enhance profitability places the investor on much firmer ground when it comes to cash flow.
Collect Fast; Pay Slow. A basic principle of cash-flow management is to collect income (e.g., rents) as quickly as possible and pay expenses (e.g., utility bills, property taxes) as slowly as possible without incurring interest charges or late fees. Uncollected rents are a classic cash-flow killer.
Build Reserves. Flush cash reserve accounts that can be tapped to meet short-term needs are crucial to successful real estate investment. Smart investors accumulate reserves and stash cash in low-risk liquid investments such as interest-bearing savings accounts, money-market funds and short-term certificates of deposit (CDs). Shop around for the most attractive interest rates.
Read Cash-Flow Statements. A formal Statement of Cash Flows, which tracks how cash moves in and out of a business, can be difficult for the non-accountant or novice investor to understand. But actual and projected cash-flow statements can be well worth the time and trouble to comprehend because they provide very useful information. Ask about inflows, outflows and variances.
Avoid Short-Term Loans. Traditional lenders typically charge high interest rates for short-term loans, and any reputable banker is likely to ask tough questions about how the investor intends to repay the loan. If the real estate investment doesn’t generate positive cash flow, how will the investor pay the interest let alone the principal?
Forgo Credit Cards. Investors who experience a cash crunch are often tempted to use credit cards as a seemingly quick and easy solution to what might appear to be a temporary problem. Unfortunately, credit cards also carry very high interest rates, which means this emergency cash comes at a high price. Burdensome interest expenses can start a downward cycle of cash-flow crunches. Disciplined managers may use credit cards for convenience, but pay off the full balance on time every month.
Copyright 2007. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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