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Tag Archives: cashflow

Finding Sustainability: The Long Haul

Bogus 12 Month Cash Flow chart

This isn’t really how our cash flow chart looks, but it’s close. Operational reserves are a big part of keeping your business going through the “prolonged droughts.” There are many months where our expenses are larger than our income, but oh those other months!

January was a record month for Hermit Haus. We closed on the sale of three houses, and one of our FortuneBuilder friends also closed on the sale of a house I helped finance. This business is really like the weather in Central Texas: prolonged droughts interrupted by floods. The droughts are periods of negative cash flow, and the floods are when you make the money to keep going. JD Esajian, who runs the CT Homes redevelopment business, once told me that if your house doesn’t sell, buy another one.

This isn’t a business for the timid or those who are risk-averse. You have to take risks to make money. As I’ve said before, the redevelopment business, unless you’re buying and selling multiple houses every month, is built on negative cash flow. You have to plan for it and have contingency plans for when your regular plans don’t come to fruition. Like when closing sales are deferred to the next month or even the one after.

By closing on the sale of three houses in January, we brought a lot of money into the company. Some of my friends might think it’s now time to trade in the old Jag for a new one. That’s not how business works. Here’s what we’re doing with all that money. Continue reading →

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Finding Sustainability: Planning for Negative Cash Flow

Bogus 12 Month Cash Flow chart

There are as many ways to represent cash flow graphically as there are applications to track it. To succeed in the redevelopment business, you have to learn to manage negative cash flow.

Don’t be scared. The real estate business is built on negative cash flow.

But what about Buffett’s first rule? Never lose money!

In my last post, we talked about the difference between cash flow and profit. This post expands on that difference. In fact, to make a profit, you have to be able to manage a business where negative cash flow is pretty much a given. I’ve even discussed situations where you may want to embrace negative cash flow on a rental to reap the benefits of long-term profitability.

So long as you are actively renovating properties, you will experience months of negative cash flow interrupted by brief floods of profits taken. Renovating properties requires you to spend money over time. Even if you have a few rentals, the positive cash flow they generate will not offset the money you spend on renovations.

You see the same thing with rentals, even if you do have more positive months. When you buy a new property, you can expect for it to generate negative cash flow—possibly enough to overcome the positive numbers from your other units—for at least the month of purchase. And if you buy it right, you’ll have to put something into getting it ready to rent. Then there’s ongoing maintenance and capital replacement (think water heaters and ACs). And finally, there’s periodic vacancy.

I only know of two ways around the inevitability of negative cash flow: Continue reading →

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Finding Sustainability: Cash Flow and Profitability

Russell is very fond of Robert Kiyosaki’s Cash Flow board game. He and Carol even used it to further their daughter’s financial education. It’s a good learning tool, even if it has a few unrealistic assumptions.
Photo Source: Amazon

Cash flow is one of the most important parts of your business. Many people equate cash flow to profitability, but they are really two different (if related) things. I’ll get to that after I refresh the definitions I’m working with. There are two types of cash flow:

Positive cash flow
Your business brings in more money than your expenses, including mortgage payments, including taxes, interest, and insurance
Negative cash flow
Your business brings in less money than its expenses

Positive and negative cash flow are closely related to profit and loss. Merriam-Webster’s second sense of “profit” is probably the most instructive of the dictionary definitions:

1 : a valuable return : gain
2 : the excess of returns over expenditure in a transaction or series of transactions; especially : the excess of the selling price of goods over their cost
3 : net income usually for a given period of time

The fifth sense distinguishes between profit and wages or rent. But when I speak of the difference between profit/loss and cash flow, profit/loss can include things, like depreciation, that exist only in the tax code and do not affect your actual bank accounts. Profit/loss on a project should also include expenses that have already been accounted for. This last bit confuses a lot of people. When the money is already spent, it can be disheartening to subtract it from a big pay check you just received. Continue reading →

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Finding Sustainability

Growth, Cash Flow, Leverage, and Equity.

Four competing goals must balance to sustain a company. Focusing too much on any one of these goals can lead to problems that may not endanger the survival of a small business but can make entrepreneurs seriously question their Whys.

Sooner or later every business struggles to survive, some more often than others. Some don’t make it.

To keep a company going, four competing requirements must balance to find the “sweet spot” of sustainability. These requirements are not exactly what they teach in business school, which is geared to make you a better employee—managers, directors, and board members are still employees. I’m talking about what I’ve learned in the entrepreneurial school of hard knocks. As shown in the graphic, the four competing but interdependent goals are:

  • Growth
  • Leverage
  • Cash Flow
  • Equity

Continue reading →

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Exit Strategies and Taxes

A cartoon house with exit strategies: walk away, refer, wholesale, double close, prehab, rehab, hold (rent), owner finance, and homestead

Our eight…er…nine Exit Strategies. When you’re evaluating a house, you must always consider what you’re going to do with it after you have it.

As I’m writing this post, it’s been exactly a year since I posted our eight exit strategies. You may notice there are nine thought balloons around the house in the graphic. I’ll get to that later.

Exit strategies are simply plans to get out of your situation. When I was writing on tax day, I got to thinking about how our tax situation affects which exit strategy on any given deal or series of deals. That’s what caused me to add the ninth strategy to the list.

Continue reading →

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