Cash flow is almost always crucial to the failure of many real estate investing projects. By their very nature the types of assets that you are likely to encounter in this sort of business are relatively less liquid than other assets. In this instance we take liquidity to mean the ease with which that asset can be turned into cash. Cash is needed for a variety of reasons including paying wages and buying raw materials.
If you do not have cash then the business functions can fall and you may end up being forced to sell your assets or close the business altogether.
A Proverbial Struggle
Sometimes your tenants will fail to pay rent or they might even refuse to pay as it is. You are then faced with a situation whereby you are constantly looking for the money to even pursue them in court. Where you really pile on the pressure, the tenant might agree to pay in installments. While this will generally work for them it does not take into account the fact that you need to carry your business as they trudge along in their installment plans.
The other cost that will require attention in terms of cash will be the repair and maintenance. If you do not pay these costs the asset will start to deteriorate beyond its original value. The deterioration will drive out any equity that you may have accumulated such that the lack of money is then causing you to lose even more money.
Those in the real estate investing business are often cash poor but asset rich. Unfortunately that is not the end of the equation because those assets require servicing. If this lack of cash a strategic result of the business plan, say if you are waiting for the market conditions to improve, then the end more than justify the means. However if it is in involuntary situation you will be facing the equivalent of business paralysis.
An accountant should be able to map out for you in the simplest terms the cash flow positions that are affecting your business. This can be an invaluable asset in terms of planning for the instabilities that are likely to affect your real estate investing business. The accountant may also be able to dissuade you from certain activities which he knows will negatively affect your cash flow.
The level of cash you have is tied in with your other business functions such as buying and selling. This is because the time of your sale might be affected by the types of cash flow problems that you are experiencing. The people who fail to make it in the real estate investing business are the ones who are caught by surprise when they discover that all of a sudden they do not have enough money to continue running their business.
Cash flow problems are recognized as the main cause of failure for people who are involved in the real estate investing business but there is a mechanism for planning to ensure that these cash flows are not catastrophic.