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It may look easy on TV, but flipping houses profitably is definitely not. To consistently make a profit, investors must be skilled in many disciplines, including market analysis, acquisitions, budgeting, and execution.
As an investor gains experience, and begins to grow their business, new challenging tasks will surface. One thing which has plagued numerous investors, and sometimes led to dire consequences, is ineffective cashflow management.
As an investor takes on multiple simultaneous projects, it becomes increasingly important for them to budget cashflow availability for potential cost overruns and time delays. Often times we see an investor budget anticipated cashflow from a future property sale into their cashflow model. This is a tactic that deserves careful thought and caution.
For example, say an investor has one home completed and listed for sale in which they anticipate making a tidy profit. They make the assumption that they will get their price and it will sell fast, so the investor buys another house in which they anticipate using the profits from that existing house as their source of funds to rehab the new one. Because investors always get the price they want for a house, and every house sells in just days, what’s wrong with that strategy, right?
Well, sometimes there are price reductions, and sometimes houses sit on the market as we all know. So, in the example, if that sale doesn’t occur, takes longer, or they do not get the price they anticipated, the investor could be heading for trouble. They may have to raise additional capital quickly or have to sit on that new house (since they don’t have rehab funds). In the house flipping business, delays are not an investor’s friend.
If you expand on this example into 5, 10 or 50 properties simultaneously, the ability to effectively manage cashflow become increasingly important. Perpetually betting on the future and assuming monies will come in to operations is dangerous. Cashflow management and maintaining liquidity in their business model are crucial skills for a successful house flipper.
Smart investors will have a conservative mindset when it comes to budgeting and minimize the risk they take in having a cash shortage in their operations. Running out of cash can not only cause a problem with one deal, but can snowball into a problem across an investor’s entire portfolio.
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