Today’s REI Classroom Lesson

As Gabriel Garcia explains, having a financial loss can make you nervous and feel weak. He shares what you can do to protect yourself from crashing and burning in this industry.

REI Classroom Summary

By building up your cash reserves and budgeting properly, you can set up your business so that finances are where they should be.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the 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.
Gabriel: Hey, this is Gabriel Garcia from Florida Cash Home Buyers down in South Florida, and today I want to talk about how to stay afloat financially in your real estate business so you don’t crash and burn.
Mike: This REI Classroom real estate lesson is sponsored by, FlipNerd’s private investor coaching program and your blueprint to investing success.
Gabriel: I think it’s a topic that really gets overlooked. It’s not sexy, but you need to know it to run your business, because I don’t know about you, I’ve run into financial problems in my business a lot, and when it happens, it sucks. I hate it. It’s very, very, very painful, and it gets me nervous.
It makes me feel like when you’re going through financial problems, it puts you in a position of weakness rather than strength. So, every time those things have happened, I’ve really stopped and really tried to understand why those things have happened, and what I can do to make sure that they don’t happen again. So, let’s talk about it.
So, if your wholesaling . . . When you’re wholesaling, you know, the financial part of the business isn’t as difficult as when you’re rehabbing, for the fact of the matter is that you have cash flow coming in all the time. There’s really not much money going out other than marketing and employees. In rehabs, you can have a ton of money going out, and you still have to put in money to buy properties as well. So between the acquisition, and the construction, and multiple projects going on at once, it can really sink your ship quick if you don’t have the finances to help them.
So, for wholesaling, I mean, the most of the stuff that you really have to look at is you have to have a budget. I would say after every deal look at . . . There’s two books I would read here, and this goes whether you’re wholesaling or rehabbing. Look at the book “Profit First.” Profit like the actual profit and loss and then . . . first, and look at the book “Simple Numbers, Big Profits.” And those two books are going to really give you a really good grasp of what you need financially.
But, you know, those books will also kind of help you explain, or you can talk to a CPA, where you need to be at tax-wise from your gross profit. You should be looking at gross profit, so if you made gross profit meaning you sold five wholesale deals for 20 a pop, you know, okay, you have 100,000, that’s your gross profit, you know. You still have overhead expenses.
So how much of your gross profit should you be budgeting for taxes, and how much should you be budgeting in the profit and reserve account, right? We create a separate tax account, and we create a separate reserve account. Every time gross profit comes in, we budget a certain percentage for taxes, and we budget a certain percentage for profit and reserves. And what we do is we want to build our reserves big enough to a point where if our main account, our expense account, our operating account, where all the money flows through gets low, we have reserves in our profit account to cover shortages, and eventually you want to get it big enough where you can start taking distributions out for yourself as a shareholder in your business. So that’s pretty much the basics stuff for wholesaling.
For rehabbing, you want to have a separate rehab account to net to operate your business, and you want to have some type of software like QuickBooks, and a bookkeeper who can update your QuickBooks constantly, because what’s going to happen is if you look at your account, the reason you want to have a separate account and your rehab account, is you can look at your account one day, and you say, “Oh, I have 20k in my account.” You know, you cut out all these checks, and then all of a sudden, you know, two days you’re overdrawn. You’re like, “How in the world did that happen?”
What happens is a lot of times, you know, your contractors and stuff deposit your checks, sometimes we’ve had contractors that deposit checks months after we gave them some. And if you’re looking at your bank balances on your bank account, it’s going to confuse you as to you really . . . what your true bank balances are. So that’s why you want to use a software like QuickBooks. You can see what your actual bank balance is, and you want the money going out of your rehab account, so you don’t confuse it with your operating account. So, that way you know that, “Hey, this is what I have for my rehab, and this is what I have for my operating.” You want to separate them. Don’t put them together.
One of the things you want to do stay afloat financially is well, is forecast. Any deal that you get in a contract, forecast what you’re going to make when you’re going to make that amount, when that money’s coming in. And you should have some type of reporting mechanism in your business to know what’s coming in and when. And you need to know what’s going out, and when, right?
So, if you’re a marketing manager or if you had planned to spend 20k this next month in marketing, your cash . . . your bank balance in your account shows you have 20k, and you don’t have any money coming in for the next two months because all your closings got detailed, well, you might want to reconsider spending that 20k. Or, you may want to take a draw out of your reserve accounts to cover that, right? So you want to have some type of system to know what’s going out, when the money is coming in, so you can plan accordingly your expenses, and so you don’t overspend or underspend.
You want to have a bookkeeper, right? I mean, that’s one of the first people you want to hire. When I talked about in our training class about doubling your business, hiring and adding people, bookkeepers also add and you want to hire that as soon as possible. You know, bookkeeper’s going to keep your books up to date, so you know, you can track what your gross profits are, you can do your forecasting, and you can track your actual balances in your rehab account, so you know what the actual balance is, not just what the bank says, because if you don’t deposit checks, it’s not going to show.
Other things you want to look at is reporting. You want to, you know, track . . . Well, you want to have a monthly financial report that you want to look at once a month. We look at ours typically within a week, two weeks, after a month. So, for instance, like we’re meeting our financial meeting for January now this next coming week, and we’re going to look at our numbers for January. So we’re going to see gross profit, we’re going to see overhead expenses. We’re going to look at our balance sheet. So, we’re going to look at our P&L report which shows us that.
We’re going to look at our balance sheet report which shows us, you know, how many properties do we have in our books as far as asset goes. How many loans do we have, our liabilities? And you want to look at that so you can see if, you know, there’s any problems there. You need to look at your balance sheet also, so that if you have any escrow deposits that are out, it’ll tell you a lot of information about your business.
You want to look at your cash flow statement. That’s another thing to look at on monthly basis. The cash flow statement will tell you how you’re doing cash flow-wise, you know? If you have a rehab business, you can make $100,000 profit this month, and you can have negative cash flow. It’s very easy in this business to do that. And so, you want to make sure that you have enough money in your reserve account to cover those negative cash flows when they happen, and you want to be aware of those cycles in your business. So, those are the reports you want to look at, and that’s pretty much it. I hope that this information is useful and that this will help you not to burn financially in your business.
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