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Major Cash Flow Killers that Can Crush Real Estate Companies
When you plan to run your real estate business smoothly, you need to comprehend two main factors – income and expenses. Now, being able to forecast these is an advantage. Having comprehensive and accurate information on these two factors enables you to understand cash flow, an essential aspect of real estate accounting. For real estate owners and investors, cash flow is the main lever they use to boost passive income.
Major Cash Flow Killers that Can Crush Real Estate Companies: Experts’ Opinions
1. Vacant Properties
– Richard Mews, CEO of SellwithRichard
In the cash flow study of a profitable venture, vacancy is an obvious drawback. Although you don’t have a paying tenant, you’ll be responsible for paying the deposit, benefits, fees, and repairs. Both of these costs are actual expenses that must be charged per month, whether or not the property is occupied.
Provide a desirable property and excellent client support to the tenants to increase occupancy. It will restrict the period of time your property, creating zero revenue by providing a happy, long-term environment for residents.
2. Financial Conflicts in Business Relationships
– John Marsano, CEO of Inheritance Advanced
Don’t expect compliance, if you have conflicting financial beliefs in a relationship. It is better not to establish a single “right way” or a “my way is the highway” kind of approach. There can be negative impacts of such an approach on a relationship and cause fights in the form of emotional abuse. It isn’t important to like how your partner goes about their finances. The main aim of the relationship in such cases should be that the long-term financial goals of the partnership are not being impacted.
I’d suggest having a discretion established for daily expenses and income disposal. No partner should be allowed to act as a financial dictator. If one partner tries to take the leadership role in such matters, it can raise conflicts, which no one wants.
3. Property Tax Amendments
Property taxes can rise almost every year, significantly disrupting your property management cash flow. Increased taxes can require you to increase the rent, may lead to late payments from tenants or other customers. Taxes can affect your entire cash flow management plan.
You can appeal for increased taxes with the local government if you think the sudden rise is unjustified. However, you need to be prepared for an increase in taxes every year.
4. Not Having the Right Type of Insurance Cover
When you run a real estate business, you obviously have properties that you rent out to tenants. As the owner of those properties, it is your obligation to get them insured for damage to the property. If you don’t know what type of insurance you need, you’ll end up pumping money into getting your properties repaired. This insurance policy doesn’t cover what you need.
So, you need to know what type of insurance policy you need for your property to manage your cash flow. This will not kill your cash flow as the property damage is covered by the insurance, and you don’t have to pay thousands of dollars for damage repairs.
5. Late Payments from Customers
– Donna Tang, Budgeting & Finance Expert from Credit Donkey
We often hear how real estate owners have to cope with late and long-term payments on a regular basis. Anything that slows the payment process could actually lead to a serious problem.
Suppose your customer starts paying you late. In such cases, predefine your payment policies and ensure that the customers are aware of the unacceptance of late payments. It’s better to build an open, warm relationship that would help you get the payment on time while ensuring that the customer also feels responsible for paying you on time.
6. Bad Management
Bad management can cause quite a lot of harm to your real estate company. In short, it can crush the business. If you’re thinking why, it’s because as part of bad management, you’re unable to build valuable relationships with tenants. As a result of these weak relationships, your client gets higher rate offerings which they would want to avoid at all costs, and would instead opt for a manager who gets them a cheaper, more reasonable rate. Clients don’t want to get themselves involved with high tenant turnover.
Furthermore, bad management can also lead to increased maintenance costs as they don’t deal with such requests properly.
7. Not Planning for Non-Paying Tenants
– Larry Wagner, Owner of Leave Key Homebuyers
If you own or are looking to own a rental property, it’s extremely important to factor in vacancy and non-paying tenants into your cash flow equation. Especially since the coronavirus and eviction moratoriums around the country, in many areas, you need to be able to withstand many months of non-payment or be at risk of losing your property.
- Know Your Numbers: With any small business, it’s extremely important to know your numbers and your financial situation. Keep track of your cash on hand weekly (at a minimum) and set a threshold that you don’t want it to fall below.
- Don’t Overpay Yourself: Even if you closed that one big sale, don’t run and withdraw the money just yet. Make sure the business is healthy and has at least 3 months of expenses in the bank because you never know when the next dry spell will occur.
8. Additional Expenses
– Lisa Lacey, CEO of Lisa Buys Austin Houses
You will only earn a large income if you hold your profits high and stop cash flow killers such as extraordinary and ordinary expenses. Suppose your real estate investment is not coming out really promising. In that case, these are the top three factors that might have a significant impact on your cash flow.
- Delayed Rent Payment: Every once in a while, your tenant might not pay rent on time, or they may not pay at all. At the end of the month, cash flow always runs low if a client hasn’t paid their rent in full, and it runs out if your tenant has missed payments. The consequence here is that you now have to pay for your expenses out of pocket (mortgage, if you have one, insurance, taxes, etc.).
- Repair and Maintenance: When a tenant usually moves out, you run into these problems. No one wants to get an email from their property manager informing them of a new furnace needing installation, leakages, or other repairs. To still have enough money enough to pay for these extra expenses, make sure to save some of your income per month. Often, those bills may be too big to handle by the generated revenue from your tenant, so you have to tap into your own wallet to help pay for it. It can create a significant downfall in cash flow if such maintenance gets piled up.
- Vacancy: If vacancies are expected to occur, then it is one of the significant negative to the cash flow. If you don’t have a tenant to help with rent and costs, it’s on you to pay insurance, maintenance, and mortgages. You cannot ignore these little payments since they are actual costs, and you still have to pay for them regardless of whether or not you are leasing. You can solve this usually by welcoming satisfied long-term tenants rather than leasing with high-paying tenants, who are likely to leave soon.
9. Material Cost
– Cyrus Karl, Real Estate Agent with Coldwell Banker
One line item we take very seriously is the cost of materials, such as lumber. During the COVID-19 pandemic, the price of lumber went up significantly, which forced us to re-evaluate a smaller multi-residential project that would have been wood-frame construction. Our primary concern was that with such volatility in the market, we might have struggled to raise the capital needed for our project vision.
10. Cash Flow Fluctuations
– Tyler Forte, Founder & CEO of Felix Homes
One of the most difficult parts of owning a real estate company is the fluctuations in cash flow. Unlike an e-commerce store that may make a sale each day, most real estate companies collect a large payment a few times per month. In order to manage your cash flow, make sure to set a strict budget and stick to it! You may also consider applying for a line of credit from a bank or credit union that you can use if you are having a slow month.
One of the best solutions to manage a fluctuating cash flow is to apply for a line of credit or interest-free credit card. I have used interest-free credit cards very effectively as they allow our company to spend a consistent amount without worrying about having to pay the entire balance off at the end of each month. Instead, we are free to pay the outstanding balance when we receive a commission on the sale of a home.
For real estate owners, cash flow management plays a central role in getting highly-required business sustainability and success. Similarly, cash flow forecasting can help you effectively plan and manage your real estate business and finances.
After learning a lot about cash flow, these questions are a must.
- Are your accountants working to improve your firm’s cash flow?
- And if you are handling accounting on your own, have you ever considered these factors discussed above?
If not, it is time to learn how to save your real estate business from these and similar, unknown cash flow killers. Cogneesol has the solution to all real estate accounting and cash flow problems. To learn how we can help, call our experts today! Call at +1 833-313-3143 or email at [email protected].
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