Managing cash flow (Cash Flow Management) is the key to manage a business efficiently, and it’s the same for the real estate business. It is cash that helps you pay your bills for your real estate business to survive.
But first, let’s delve deeper into what precisely cash flow is in real estate investments.
Cash flow is nothing but the profit that comes in monthly after paying for all expenses and keeping aside some cash for future expenses.
If you buy a property with an intent to hold it and sell it at a profit later on, cash flow is a crucial element to consider.
You can enjoy many benefits from prudent real estate cash flow management. Here are a few of the prime benefits of maintaining a positive cash flow for your real estate business:
The more cash flow you have, the more scope there is to reinvest some of your excess funds into new projects or diversify.
A healthy cash flow serves as a safety net you can depend on in case of contingencies. A prime example is the recent and ongoing pandemic. Only a business with a good cash flow could survive the unprecedented crisis.
There are numerous costs linked to buying a property like the down payment, property tax, monthly mortgage payments, maintenance, etc. However, when you buy a property, you can recover the money you invest through a positive cash flow.
Lenders are more likely to approve loans for you to buy more property if you have a positive cash flow. You will appear to them as a responsible investor who can execute efficient cash flow management.
If there is a sudden slump in the real estate market, having a positive cash flow gives you access to funds under challenging times. Failing this, you may have to start selling your property at lower rates, which can be disastrous for your business.
Having seen the benefits of a positive cash flow, you may be interested to know how to calculate cash flow.
The general formula for cash flow is:
By way of example, suppose you own a property that gives you a monthly income through the rent of $20,000. Your monthly expenses come to $5,000. Your monthly cash flow will be (20,000-5,000) = $15,000.
You can calculate your cash flow manually as described above or use a real estate cash flow calculator which provides an accurate result. These tools are readily available online.
Once you start monitoring your cash flow, you will see multiple benefits. Prepare a real estate cash flow analysis spreadsheet that gives you an overview of all your real estate investments.
How you create your real estate cash flow model will decide the success of your real estate business. The objective that you need to achieve is to reduce outgoing expenses and increase incoming expenses.
Here are a few great ways you can manage your cash flow:
It’s a good idea to create short-term projections for each property you own. First, include “rent delinquency” (late payment of rent) in your projections. Then, calculate the maximum amount level of rent delinquency you can survive through before running out of cash.
Mortgage payments on your property are the biggest expenditure that you will typically incur. Therefore, you need to keep your lender and bank in the loop, particularly if you intend to opt for financial help.
You can get a lot of support to get your financial arrangements amended. Interest payments, for instance, come under forgivable expenses if you have Paycheck Protection.
Your property tax rates aren’t carved in granite. Under certain circumstances like construction defects and market declines, the market value of your property can get devalued.
Under the above condition, you can contest your property’s value and get your property tax reduced. In some states in the US, you can even get disaster-related adjustments on property value.
Negotiate payment terms with your vendors. You can also negotiate the payment dates for some goods and services. All bills don’t have to be paid on the dot on the due date. When you receive a deliverable from a vendor, don’t feel obliged to pay immediately. Most vendors will be agreeable to a slightly delayed payment.
Different government lending programs enable you to have access to additional funds. For example, you can work up a line of credit with organizations like the Federal Main Street Lending Program or Economic Injury Disaster Loans for short-term needs in case of financial distress.
A valuable funding source can be non-banking financial corporations (NBFCs), also called Non-Banking Financial Institutions (NBFIs). You may pay higher interest rates, but the terms and conditions of such organizations are much more lenient, and you can get access to more funds than traditional banks.
Eviction can sometimes work against you, resulting in a legal tangle, in addition to a vacant property that is costing you money to maintain. However, you could perhaps find a workaround in cases of rent delinquency, like finding business interruption insurance or other means of helping tenants in distress to cover their rent payments and losses.
The real estate business is among the highest-growth sectors in the world. But you need to crunch the numbers. If you want to thrive in a competitive but lucrative business such as real estate, you need to practice good cash flow management and make it give you a good return on investment (RoI).
Once you realize the relevance and benefits of cash flow management in real estate management, you can follow the tips provided here for your real estate business to thrive and prosper.
OHI is a fifteen-year-old real estate services company working with 50+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We currently provide these services to a portfolio of 75000 units across clients.
We invite you to experience finance and accounting outsourcing through us.
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