In business the bottom line is always the bottom line. You can have a steady stream of deals coming in but if you aren’t smart with your money it won’t make a difference. One of the biggest adjustments for new investors is accepting the fact that they are running a business. This means focusing on money management, expenses and return on investment. These areas may be boring and tedious but they are the keys to running a profitable business. This is especially the case as you are just starting out. With money tight every financial decision you make is magnified. One poor expense or one oversight can set your business back months. Here are five money management tips that every new investor needs to follow.
- Be Picky With Expenses. Running a real estate business is very similar to running your household. There are probably certain times when you want something but you may not have the funds available to buy them. Instead of stretching yourself too thin you pick the items you really need over items you simply want. The same concept should be applied to your business. Think about which items have a direct impact on your day to day operations. That is where the bulk of your expenses should be allocated. You may want to have a sharp looking website but do you really need it? The same is the case with spending money on office space. It is more important to have a new laptop and improved technology rather than 500 square feet of office. Narrowing down expenses is not always easy but you need to always think about what your business needs rather than what you want.
- Spend On Right Areas. There are ways to be frugal with your money without being cheap. In business it is important to spend money in the right places. You may be able to save some money in certain areas but what are you really gaining by doing so? Items like insurance and leases are too important to go with the cheapest alternatives. Spending just a little more money can end up saving you thousands of dollars in the long run. You should never spend money that would simply put a band aid over a problem. By doing this all you are doing is deferring the expense for a later date. When that time comes you can cost yourself much more in the long run. Think about items that will let you sleep at night instead of waiting for the other shoe to drop. If you use this rule of thumb there may be some lean times when you need to watch every dollar but your business will be better off for it.
- Don’t Spend Your Check Before You Close. The manner in which a real estate investor earns a living is much different than a traditional W2 employee. You may go several months between rehab deals. If you don’t budget your funds properly you could find yourself in trouble. It is important to remember that closing a deal doesn’t mean all of the profits are yours to spend. Before spending a dollar on yourself you need to pay off any expenses and balances you endured during the process. You also need to stash some money aside so you can pay Uncle Sam when the time comes. It is also a good idea to think about how you can reinvest some capital back into your business. If you do not stay on top of lead generation any deal you close could be a onetime deal. When everything is said and done you may not have too much left over for yourself. This can get frustrating and annoying at times but if you don’t stay disciplined your business will never move forward.
- Establish A Rainy Day Fund. One of the principals for any business is to expect the unexpected. This is certainly the case in the world of real estate. Regardless of what type of investing you do you need to have capital stored away in the event something unexpected happens. You never know when your furnace will stop working or when a deal will come out of left field that can be a real home run. If you do not have capital for these items it will cause your business to scramble for solutions. You should take a portion of every closing and place that into a separate account. This money should only be used in extreme circumstances and replaced as quickly as possible. Not only do reserves allow you to deal with an expected problem but they free your mind to always make the best decisions for your business.
- Organization. Good money management means staying on top of your expenses at all times. You need to know every dollar that goes in and out of your business. The best way to do this is if you are organized. It is not enough to have a roundabout idea of what you spent on lead generation last month. You need to be able to quickly access exactly what you spent and the return on those expenses. There are dozens of accounting tools that can make this task as easy as possible. Find the best app or program that you are most comfortable using to help you stay organized.
Money management shouldn’t be intimidating or boring. You can find ways to make it interesting and even a little fun. Good money management can completely change the way you look at and run your business.
