This very possibly could be the most important article I have ever written for some of you.
What do you do when you have cash flow issues?
This can cripple your business whether your are an experienced RE investor or if your a beginner.
In early 2002, I had hit the wall. A $10,000 a month negative cash flow problem. I’d just quit my J.O.B. of 17-1/2 years so I could achieve my dream of becoming a fulltime RE investor.
I thought I had this business all figured out. I’d attended great live events and studied at the feet of the masters. I didn’t for see the downturn in the rental market in my city and it reached up and bit me. I hadn’t done the job of finding private lenders, so I couldn’t fund my business.
Fortunately, I had a 15 minute coaching phone call with Ron LeGrand because I had signed up for a mentoring program with him. That 15 minute call got me on the right path.
He even made me the feature article on a monthly newsletter he published that month.
Some of actions he gave me were:
1) Get out 10 pointer sign for each empty house. Replace the ones that come up missing each week. Get the empties filled.
2) Get a mortgage broker that will handle C&D credit and get some of my lease option tenant/buyers cashed out.
3) Cut spending on buying houses and focuses on selling. He had more actions and I’ll share them in a future newsletter.
Let me list a few ways to get out of trouble or at least generate some near term cash…
Yep, if you’re paying a private lender 15% and you are holding the property longer than planned, you need to make sure you don’t get upside down on the property. Watch your profit margin. If you need too, either bring in a private lender at a lower rate or find a lending institution for 6% or 7% and refi. Now, you’ll need to do the math and see where the breakeven is:
a) Loan x 15%/12 = interest per month
b) Loan x 6%/12 = interest per month
c) A – B = $ saved per month
d) Closing cost $ / $ saved / mo = breakeven
So if the breakeven calculation comes out to 6 months then if you are going to hold the property longer than 6 months, then do the refi.
2) Find at least 3 mortgage brokers and let them compete for your business.
3) If you have a bunch of equity in the property…
a) Sell at full price and if need be, carry back a 2nd mortgage and then sell the 2nd.
Hint: How to sell a 2nd? Run an ad in the local paper.
b) Wholesale to a RE investor
c) Cut price and look for a cash buyer
4) Look at your ‘model’. What I mean by that is to take a hard unbiased look at the structure of your business. Is it making you money? Do you know your real numbers?
Let me give you an example. When I got into the business, I was using a buy & hold philosophy of low end properties. It worked but I wanted to make more money and not wait years to payoff the property to have a great cash flow.
So, I decided to buy, fix & sell the same houses with a lease option exit strategy. I’d fix the property to sell and not to rent so I had a larger lien on the property.
It didn’t work. The reason it didn’t work was because the tenant/buyer had a ‘renters’ mentality on these low end houses.
They would live in the property for a few months to a year and then quit paying. I’d evict, put $3,000 back in the property to get it up to speed and then do it all over again (and again and again).
When I did the math, I realized that I wasn’t making the profit I had expected. To top it off, when I did get one of these closed, I’d end up carrying back a 2nd mortgage. Ouch! That just added insult to injury.
Let me give you a model that might work for some of you.
1) Target a medium price range property or higher.
2) Purchase for all cash using private money. Let the money accrue.
3) Fix and retail.
4) If not sold by 6th month, then refi at 6-7% interest
5) This frees up the private lenders money so you can use it again.
6) Put a lease option tenant or land contract (contract for deed) buyer in the property. This covers your monthly expenses.
Look at all the upsides to this model. You buy a property for all cash and have zero holding cost. You are trying to retail and get quick cash. If it doesn’t sell you go for soft terms, free up the private lender money so you can use it again and get a cash flow property because you refi the property at a low interest rate.
This cookie cutter approach will make you wealthy.
5) Tenant/buyers that have credit challenges…
a) If they need to open up a credit line to get financed, I hand them the form when e do the lease/option or land contract (contract for deed for some of you).
b) Put an escalation clause in the contract both on the price of the property & in the monthly rent/mortgage.
Something I am currently testing…
I am purchasing credit repair packages and then offering them to my tenant/buyers that have credit challenges. I’ll keep you posted.
In closing, I realize some of the items above might not be very popular with some of you but on the other hand, it might be a life saver to others.
The key to all of this is to take action.