Every Dollar You Spend Has An Impact
By Paul Esajian on October 20, 2014
Every dollar you spend on your business has an impact somewhere else. If you decide that you want to expand your marketing, it will take away from your ability to use that money elsewhere. As an investor, what you will find is that it often takes more money than you realize to run your business. Moreover, you are often left with a much smaller profit than you thought at the end of most deals. How you spend your money, big and small, will impact your bottom line and the future steps you take in your business.
If you have the mindset that you are running a business and not just trying to survive, you will make much better decisions. If you are only focused on the next deal and how you will spend the money on yourself, the profits will be short lived. You will be back to square one before you know it. You can certainly take a share of the profits, but this must be done in moderation. For your first few deals, you should put a majority of the profits back into your business. Even after you are established, you should put a large percentage into purchasing other properties, increasing rental property reserve funds, finding new deals or paying down debts. The more you put back into your business, the longer you can keep the process turning over and your business growing.
It can be pretty frustrating to work for months on a deal and to not get a bulk of the returns out of it. This is the secret of most successful businesses: Instead of paying themselves first, they understand that it often takes money to make money. This is especially the case when it comes to real estate. There are many different areas that require upfront money . Things may seem great after you close a deal, but if you want that feeling to last you need to prioritize your money and choose what is important to you.
The first area that you need to strengthen is with your incoming leads. If you are not working on new leads, it is very difficult to close deals. This could mean allocating money on a large direct mailing campaign or something smaller, such as improving your website. The quality and volume of the leads you bring in will define the strength of your business. If you neglect this area, you won’t have any deals to work on. Whatever type of marketing you prefer, you should allocate some funds on every deal you close to rebuilding your pipeline. The most expensive methods may not be the most productive, so it is important not to blindly throw money into marketing without knowing what you are getting out of it.
Regardless if you use lender financing or private money, you will need some of your own money to close deals. If you use lender financing, that money has to be in an existing account for at least 60 days. The quicker you can get that money in the bank, the sooner the clock starts. Even if you use private money, you may need capital for a title search, inspection and other closing costs. If you don’t have money for these areas, you will start cutting corners that can eventually lead to bad decisions. This is part of doing business and this money should be ready to spend as you investigate every new deal.
The quickest way for a landlord to ruin his property portfolio is by neglecting it. Even the best properties can be done in if they are not taken care of. This means spending money on seasonal maintenance and periodic upgrades. If you do not have a dedicated property account set up you need to do so immediately. This will allow you to stay ahead of problems before they do happen and if something unexpected comes up the money to take care of it. If the furnace stops working in your property tomorrow do you have available funds to get a new one? This means not putting the purchase on credit, creating new debt and lowering the cash flow on the property. This means having the savings available to get whatever you need to if something breaks unexpectedly. By having the funds available you can get the best deal, get whatever done you need to and still maintain the cash flow in your property.
Even the most well run businesses will have miscellaneous expenses that show up every month. Between a business lunch with a realtor and an updated phone for work, there are always a few dozen expenses that are thrown in the mix. This money has to come from somewhere. By saving money on every deal, you will be able to have funds when you need them. Nice vacations, cars and dinners are nice, but they are often short lived and you won’t get anything for your business out of them. It certainly is boring saving your money or allocating it back into your business, but in time you will have a surplus of money. It will take some time to get to that point, but if you are disciplined with your expenditures, you will learn to make it work for you.