The following is a guest post by Jimmy Moncrief of realestatefinancehq.com .
As an underwriter, one of the most dangerous things you can do is to make assumptions. As they say – assumption is mother of all foul-ups. However, for this article I’m going to make two assumptions:
First of all, as a fellow reader of justaskbenwhy.com I’m going to make the assumption that you are serious about real estate investing. Secondly, I’m going to assume you probably have a real estate investment or two under your belt and are presently growing your real estate investment company.
With those assumptions made, let’s begin…
As a real estate investor you know all of the positives: passive cash-flow, appreciation, other-people’s money, tax-advantages, etc. So I’m not going to focus on that. Instead, I’m going to focus on a big negative that you may or not yet be experiencing. But you will face this at some point – this negative item is experienced by EVERY REAL ESTATE INVESTOR. And it doesn’t matter what kind of real estate investor you are – flipper, long-term rentals, developer, etc.
What negative event am I talking about?
Real estate is a capital intensive business. This is what keeps newbies from entering the game, and what keeps current players from growing exponentially. So what to do?
HAVE A PLAN
If you are a serious real estate investor, you don’t just need to have a plan for your real estate business. You need to have a capital plan. How do you plan to get the capital to acquire and manage the real estate you want to own in the future?
Think about that for several minutes…
- Write down on a separate sheet of paper right now, how much money you need in capital to acquire the real estate you want to buy in the next several years.
- Write-down how you are going to acquire that capital in the next several years.
- Finally, put all of this together in a spreadsheet.
Lacking capital is a primary problem that is rarely talked about by real estate investors. Everybody wants to talk about whole-selling, flipping, tax-liens, big multi-family – Ben Leybovich is infamous with that. It’s easy to see why people want to talk about those – big, bright shiny objects.
I want to talk about something very simple:
Cash – the single most important thing a bank underwriter evaluates when analyzing your credit-worthiness.
Don’t just take my word for it and leave some nasty comment in the comments section. Look-up any publicly-traded real estate company (note, most of them are organized as REITs). Find one, listen to the last quarters conference-call. The vast-majority of the time is spent on cash. Specifically, with rent and development income (cash-in) and the capital structure (debt, equity, etc).
If the majority of publicly-traded real estate company’s spend their time focused on their capital structure, why aren’t you spending your time like this?
Jimmy Moncrief is a bank credit officer and real estate investor. He blogs at realestatefinancehq.com. He has a special report for JustAskBenWhy readers:“Top 6 Things You Can Do To Negotiate Better Terms From Your Lenders.” http://realestatefinancehq.com/justaskben