Reasons to Never Rely on Excess Cash flow to Fund Your Rehabs

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Kevin: Hey guys, Kevin Bupp here from the mobilehomeparkacademy.com and the Real Estate Investing for Cash Flow podcast. Today I’ll be the host of your REI Classroom tip, and in today’s show I’m going to be discussing with you the reasons why you should never rely on excess cash flow to fund your rehabs or turnarounds.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Kevin: Here’s what I mean by that. You’re buying a property. Let’s just assume it’s an apartment building. It needs X amount of dollars in capital improvements when you buy it. Obviously you’re going to put aside money for a down payment, so you’ve got to come up with some capital for that. Let’s say the property needs $100,000 of capital improvements in order to bring it up to its full potential.
I’ve seen this mistake happen so many times before. I find investors that have enough money for the down payment. They can get into that investment. But, they don’t have the additional money for the capital improvements. What they do, in their mind, they think, “Well, I’m going to get into this property because it’s seemingly a good deal. What I’ll do is just over time I’m just going to pay for those renovations out of cash flow. I just won’t take any money from this property. I’ll just put it right back in and I’ll renovate it over time, even if it takes me two, three, four years. I’ll renovate it over time.”
Here’s what happens. That sounds like a great idea, especially when you’re just getting started. All you want to do is buy your very first property, right? It sounds like a wonderful idea. It sounds like it would work out perfectly.
Well, here’s what happens. You become a slave to that property. You work really hard. You’re putting the efforts in. You’re taking all that cash flow each and every month. It’s not going in your pocket like an investment should. It’s going back into that property. Resentment gets built very quickly, resentment from yourself, resentment maybe from your wife or your significant other that sees that you’re putting so much time into this property but yet you’re not really enjoying any fruits of your labor because there’s no income coming in.
You bought the property because you want an income stream. You want cash flow. Yet, you become a slave to the property and it’s really just there supporting itself. It’s not really making any headway.
The suggestion I make with every investor: get into a property that you can afford not only from a down payment standpoint but also from a renovation standpoint. Make sure that you have enough in your budget, whether you’re raising capital or using your own money, make sure that you have enough to actually do everything all at once. That way you get into the property, you get it repositioned, you turn it around and sooner than later you can start actually enjoying the fruits of your labor which is the cash flow.
I always talk about cash flow. You want to have that passive cash flow stream. You want to enjoy it soon. You don’t want to wait until five years down the road when you’ve got resentment built and you’ve become a slave to this property. My suggestion again: raise enough capital in the front side or have enough capital to get into the deal yourself to do all the capital improvements as well as fund the down payment.
Guys, that’s all I have for today’s lesson. I want to thank you again for joining me. Until we meet again next time, I want you to get out there, take action and make some cash flow happen.
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