Cashflow is King!
Cashflow is King!
One of the most important lessons to learn early in business and rental property is that cash flow is king! In the past some have tried to question this universality, but at the end of the day a real estate business that does not generate enough cash flow to get through economic crises is a ticking time bomb! So here’s why cashflow is so important and why you should make it a priority.
It all starts with cash flow
When it comes to borrowing money to buy a property, the first thing your banker asks of you is proof of income! Either your personal income and / or those of the building you want (economic value). Cash flow is the cornerstone of all bank loans. Why? Because cash flow is the fiscal solidity of an individual or a legal person (inc.). If your ratios aren’t working, conventional lenders will put an insolvency tag on your file.
“The cash flow is what allows your creditor to be able to sleep at night, and apprehend that you will be able to repay it. “
Cash flow is the cornerstone of all real estate wealth and all bank loans. It is the gas of the capitalist world , it is the energy capable of getting you out of all the miseries. It’s not only important, it’s vital!
When the music stops!
The economy is a bit like playing the musical chair, everyone knows the music is going to stop someday, but as long as the music is playing everything is fine. When the music stops by “surprise”, it is there that one separates the men from the children. This is where we find out who best masters the rules of capitalism. In this era of viruses where even tenants seem to have had carte blanche not to pay their rent on date and on time;) it takes a tough kidney to keep the raft afloat. And this is where cash flow takes its place on the throne.
Luckily, the coronavirus was just an exercise!
Currently all entrepreneurs who have cash flow problems are very lucky! Because the government, thanks to the money of the banks, will take care of practically everything. Plus the banks are understanding… 😉 But in real life when real recessions and crises occur, the government does not come to the aid of rental owners. He takes care of the most disadvantaged first, and I’ll pass you a piece of paper that rental owners get out of the way. Those who experienced the 7-8% vacation rates in the 90s, and the sky-high interest rates of the 80s, know what I’m talking about. Today with the coronavirus we are lucky., our tenants will all be showered with cash flow of $ 2,000 per month… 😉 but we won’t always have it so easy. One day it will hurt.
“And do you know which businesses always close first? All those with negative cash flow, followed by all those with just cash flow on the buttock. “
Unexpected, no problem
An economic crisis, works, renovations, an incident .., no problem I have cash flow and I have money in the account. The more cash flow you have, the more you will have free rein to face the unforeseeable and borrow again if necessary. The cashflow ensures that you dispel the clouds above your head and get through the storms.
Without cash flow you will go bankrupt
In Monopoly as in life, cashflow is king! In Monopoly you always have to know how to keep the right ratio of assets to money in your pockets. You can’t take a plank ride without cash, just as you can’t claim top honors if you stay 100% cash. Without assets, in the long term, you will be bled by the big red hotels. 😉 The first player who gets the best cash flow from their investments is usually the big winner! It is he who will have the privilege of bankrupting the other players. When the money is flowing there is no insurmountable problem. 😉
“Without cash flow, my little man, your dog is dead. “
And the added value in all of this?
In recent years, many real estate investors have let themselves be intoxicated by the capital gain. When the economy is booming, the average investor tends to downplay the importance and power of cash flow. The investor lets himself be rocked by the flow of waves of the great promises of capital gain. Thus, many accept to arrive kif-kif for two or three years. Their analysis is not bad: “if the properties take 6% per year in this sector …, at the end of the day my net assets will increase and then I will be able to refinance …”
“ BAM in the teeth, this is usually when the financial crisis arises. ” 😉
The crisis strikes without warning
The average investor then experiences his first real liquidity crisis. While it is true that capital gain allows you to build a real estate empire faster than cash flow…, capital gain is far from being as solid and stable as cash flow. The surplus value is greatly dependent on banking rules, interest rates, supply and demand, etc. When times are hard, whether values stagnate or fall: surplus value is the first to lose its feathers. And that’s when cashflow takes back its rights! Without cash flow, the added value melts like snow in the sun. I think it’s fair to say that the added value will always have a place of choice, but that it will always be the big second. 😉
Cashflow isn’t just king, it’s what sets men apart from kids. It is the oxygen of your company, it is the lung that allows you to move forward. Cashflow is the freedom to choose. It’s your financial freedom! And no matter what the big gurus in your neighborhood say, cashflow is the ace up your sleeve that keeps you going while others close their doors. 😉 It is the king in your game who provides the foundation for your empire. The queen of all sureties. The valet who will always be by your side in times of crisis. If everything starts with cash flow, everything also ends with cash flow.Remember that the more reckless investors who neglect cash flow will always be the first to lose money, and the first to go out of business!