Running out of money is one of the leading mistakes made by real estate investors. There are many reasons why this happens but the bottomline result is always the same — it can kill your opportunity for success. In part two of his series entitled “Running Out of Money,” Bill shares ten (well, really eleven) tips on how you can avoid falling into this trap that has messed up way too many investors.
In part one of this series, Bill talked about:
In fact, all my examples in both podcasts are with single family homes. I use those examples because it is simpler for most people to relate to, however, as most who have listened know, my preference is multifamily.
See episode #090 – “If I had $100,000 to Invest in Real Estate…” and you’ll better understand while that is my preference. However, my examples here with single family homes can also work and work well.
Let’s take a look at some of the ways you can get into trouble and how you can prevent those situations from happening.
When I shop for properties, the best deals are the “off-market” deals that might be distressed one way or another. One of the most common distressed properties, especially for multifamily, is a value-add project that runs out of money on the rehab – investors grow impatient as they try to get the funds to finish and the investors push for a sale just to hopefully get there original investment back.
This is a prime example of “Running Out of Money”
In hindsight, you could say they obviously launched into something that they did not carefully plan or estimate accurately. But maybe they did but contractors lied and low-balled to win the bid but now the “true” numbers are coming out
While You are Building Your Portfolio
Most of us are building our portfolio as we go along. We have a certain amount of money to start with, allow money for rehab, capital improvements, upgrades, re-positioning, etc. and we use that money to launch our portfolio building effort. Then, we use leverage to continually grow the portfolio.
You can avoid the “leveraging out” situation by…
What does the classic leverage approach look like?
Of course, you have to meet certain goals
To keep this train going, you need to depend on the prior property’s performance, but what happens when there’s a train wreck
The train comes to a resounding halt and all of a sudden your cash flowing locomotive becomes a cash sucking black hole that is costing more than it’s generating
You need to invest wisely… especially as we are approaching a market correction
If you have a “break-even income number” to cover your budget and all regular operating expenses, I say to double that goal. If you need $50,000, make it $100,000 your goal. The extra can just go into your reserves to give you the cushion you need at that major time of need.
Why do I say that:
Well, that’s it for today!
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