Everything Revolves Around Your Business’s Bottom Line
By Paul Esajian on March 23, 2015
As an investor, it is important to stay focused on the bottom line. Having multiple deals on your plate is great, but if you are scrambling around from one deal to the next without maximizing profit, you will be left disappointed with the results. There are times in your business when you may want to take on a deal that you know will not be a home run just to gain valuable contacts or experience. It is when you make a habit out of this that it starts to become a problem. It is not the number of deals that you close, but the amount you make on them that is important. If you lose track of your bottom line, all your hard work could be for naught.
There are many ways to get deals and many options once you have them. Acquiring every type of deal – from wholesale to rehab – can cost you money. Do you know how much you spent on your last marketing campaign? How about the last time you did a mailing? Direct mail can produce great results, but it can also be very costly if done wrong. Everything from the list to the stamps will add up. If you mail more than once ,you can be staring at quite a large expense. You may get your phone to ring but if you spent thousands of dollars to do so is it really worth it? This will impact most of the decisions you make on the property moving forward. If the acquisition cost to get a deal is low you will be more apt to spend money on the property once you get it knowing that you have a bigger spread to work with. If you are working tight you may cut some corners that are needed to maximize the value. This all starts with knowing how you get your deals and what it costs you for each one.
The most popular form of investing currently is rehabbing and flipping. All you need to do is turn on the TV at night and you can most likely find a show dedicated to flipping real estate. Nine out ten deals that are shown make a profit and have a happy ending. What is often overlooked with new investors are the hidden costs that impact your bottom line. Every day that goes by with a rehab costs you money. You are paying taxes, utilities, insurance and in some cases a loan repayment each day until you sell the property. If you don’t sell for a few months you could be looking at a few thousand dollars during that time. This may not seem like much but it is coming out of your bottom line. Over the course of a year this could mean the difference in another round of marketing and waiting until you have enough money to do so.
Do you know all of the fees that you are paying? Not only do you need to know exactly what you are paying on every deal but there may are annual fees you need to stay on top of. Getting your realtors license may seem like a good idea but between the continuing education and annual fees these can easily add up to over $1000. Inside of each deal you can have real estate commissions, attorney’s fees, loan fees and prepaid taxes that will eat away at your bottom line. Before you go to a closing you should have your attorney provide you with an estimated settlement statement that will break down all of these costs. If you take out a loan the property taxes alone could be thousands of dollars. Throw in real estate commission and other fees and you can be close to $10,000 of unaccounted for fees that will greatly reduce your bottom line.
Finally, every investor needs a good accountant. Because of the nature of how you earn money it is important to allocate a portion of every deal to pay Uncle Sam. The check you get at the closing does not include any tax withholding. If you treat this check like it is your bottom line sooner or later you will be forced to face the music and pay the government. You should know how much you need to take out before you even get involved in any deal. Some deals are still worth it in spite of the tax payment but you need to talk to your accountant to get all the details beforehand.
There are some investors who won’t get involved in a deal unless that know their bottom line will be at a certain number while others will take anything they can get. There is no right or wrong way to approach the business but however you work you need to know what you are working for. Time is money in every business and in some cases your time may be better spent doing something else that can yield a greater return. This starts with the knowledge of every expense and what you are paying to acquire the lead that turns into a deal. If you don’t know where your money is going you will often be very disappointed with the returns. Making a profit is great but not nearly as important as knowing what your bottom line is.