According to the SBA, over 50% of small businesses fail in the first five years. I would venture to say that real estate investing is a lot tougher and even more fail. There are so many moving pieces but managing the cash flow is the silent killer.
Here is how the process works for us:
- You write one big check to buy the house
You can use private or hard money loans to leverage your money. It is expensive but a life saver. In this market even the most aggressive lenders require us to have 20% of the total cost into the deal.
- You write many little checks to fix the house
Your contractors get paid upfront no matter what.
- You wait 1 to 3 months for offers and escrow to close
During this time you will have loan payments, property tax bills, utility bills, potential break-ins and vandalism.
- You sell the house and hope to get an even bigger check back
This is the most discouraging process for us. Very little of it is in your control. Lenders will come up with ridiculous requirements and ridiculous timeframes. They will waste 45 days and deny the borrower. They will ask for whatever they want and you will give it to them because they call the shots.
As arduous as the process seems, it is workable and relatively easy to manage when you have one or two houses in the cycle at a time. But as your business grows you will need to have more and more active deals in the pipeline at once.
Here are some tips that have helped us as we have scaled relatively quickly.
- Be selective on what buyer you put into escrow
Early on I made this mistake multiple times. I would put the absolute highest offer in escrow if I saw a lender approval letter. Not all offers are created equal. Don’t waste your time with marginal buyers.
- Stay on budget!
Once you spend extra money it is gone forever. Just because a deal has a good margin doesn’t give you the right to be flexible on the budget.
- Don’t do mediocre deals
If you have your money and time tied up in mediocre deals you might have to pass on some awesome ones! Don’t waste your time with them.
- Pick Aggressive Buyer’s Agent
In 2010 especially we had many scenarios where we had multiple offers. I would pick my top 3 or 4 offers and try to get their highest and best. But secretly I always leaned towards the agents that will call me every day or three times a day to see how they can get their client in the house. If they are willing to bug me that much, imagine what they will do when the lender needs something.
- Never count on the money until it is in your bank account
In 2011 we had two deals fall out of escrow after they received loan docs. The money isn’t made until it is in your bank account.
- Find other streams of income to level out the peaks and valleys
We have slowly been investing our profits into rentals. Those checks come in every month and help us survive the valleys. Wholesaling is another good way to even things out.
- Always keep reserve cash on hand
Last and probably the most important is, you need to have solid reserves or access to money. Stuff happens and when you own real estate it usually costs a lot of money to fix.