By Tod Snodgrass
Real estate investors (REIers) must devote more of their time today, than in days past, to planning and managing finances and those methods and functions that improve cash flow. Good cash flow requires financial and management controls. For example, reducing expenses and/or increasing revenues are worthy goals every REIer should be constantly seeking to implement.
Where to start?
A well-conceived business plan and budget offer a road map for your future. For example, an analysis of quarterly financial statements will tell you whether you are on or off course, positively or negatively, several times a year. Without appropriate planning, controlling cash flow and improving financial management are impossible. There is really no mystery to the concept of cash flow, yet it never ceases to amaze how often REIers overspend year after year without even realizing it; result: low or no profits.
Cash Flow Enhancement Techniques
- Create an annual budget. This is based on commitments already made or those you will make this year. Simply list all your expenses vs. income, and you can predict whether you will be staring at positive or negative cash flow during the next 12 months.
- Potential revenue increase and/or expense-reduction enhancements
- Upgrade your existing unit(s) via cosmetic (paint, landscaping, clean up) or more serious efforts such as replacing old: countertops, flooring, bath/kitchen fixtures, etc. You can then refi to pull out the money you just sunk into the unit, increase rents to marketplace rates, thereby “paying for” any additional costs over time. Result: increased cash flow (eventually), plus the unit is now worth more due to the upgrades.
- 1031 Exchange: upgrade from an equity-rich SFR to say, a triplex for example. This is a tax-postponed opportunity to collect more rent from the three units vs. one previous unit. Result: higher cash flow.
- Shift your acquisition focus from areas with no or slow future market (percentage) appreciation, to areas that would appear to be better bets. Sell (or borrow against) current rental properties and use the proceeds to invest in greener pastures.
- Refi if you can get a lower interest rate as a result. Every dollar saved is new positive cash flow.
- Draw cash out by selling equity shares to other REIers vs. borrowing the money (debt)
- Switch from long term to short term (AirBnB-type) rentals if you can improve annual cash flow.
- Convert from say annual leases to month-to-month rentals. This way you can upgrade rental rates on demand to reflect local market conditions, and/or perhaps in anticipation of converting to a short-term-rental model.
Take Advantage of Geographic Tax Straddle Opportunities
If you are thinking about moving to a different locale, know this: Some regions in the US have some sharp discontinuities in their tax rates but few obvious barriers to crossing the border. Such areas are great places to look for the consequences of even small differences in prevailing tax rates, that you can use to your own personal financial advantage. For example, the following states currently don’t have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Here are some tax differences between adjoining states. Some of the differences are so great, that residents of the area live and/or earn in one state, but shop and/or invest in the next state.
Income tax: Washington: 0%, Oregon: up to 7%
Nevada: 0%, California (up to) 10.3%
New Hampshire: 0%, Vermont: up to 6%
Sales tax: Oregon: 0%, Washington State: 8.87% (average rate)
Delaware: 0% vs. 6% or more in New Jersey, Maryland and Pennsylvania
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Contact info: Tod Snodgrass, email@example.com, 310-408-7015