Are you worried about managing the cash flow in your real estate portfolio? Do you know how to effectively manage your real estate investments?
Cash flow management is a critical aspect of real estate investing that can greatly impact your financial success. To shed light on this topic, I had an insightful conversation with renowned real estate investor Christian Szpilfogel from Aliferous Group. In this blog post, we will explore the 7 key strategies and valuable insights, providing you with practical guidance to enhance your cash flow management skills in real estate investing.
Watch my interview with Christian below:
Ensuring Baseline Cash Flow Covers Personal Expenses:
One of the fundamental principles is the importance of ensuring that your baseline cash flow covers personal expenses. By carefully evaluating your cash flow projections and making necessary adjustments, you can create a solid financial foundation that supports both your personal and investment needs.
Building Cash Flow Reserves:
Maintaining adequate cash flow reserves is crucial for weathering unexpected expenses and market fluctuations. Maintaining 3-4 months’ worth of cash flow reserves to provide a safety net and minimize financial stress. This strategic approach enables investors to navigate challenges confidently and seize new opportunities when they arise.
Managing Real Estate Portfolios as a Business:
Treating your real estate investments like a business is a key mindset shift. This approach involves operational budgeting, forecasting revenue and expenses, and implementing systems such as Profit First to save up for reserves. By adopting a business-focused approach, you can optimize your cash flow and maximize profitability.
Effective Financial Management:
Emphasizing the significance of separating income and revenue through a property management company, this video highlights how it helps manage cash flow and provides a clear overview of the investment’s financial performance. Additionally, maintaining accurate books and hiring a skilled accountant contribute to long-term success by ensuring proper financial management.
Leveraging Multi-Family Properties:
Investing in multi-family properties offers predictable income streams and a deterministic business case. By increasing net operating income through strategic management and value-add initiatives, investors can enhance property value and cash flow, creating long-term wealth and stability.
Internal Rate of Return (IRR)
Christian and I discuss the concept of Internal Rate of Return (IRR) and its importance in evaluating business cases. While many people are familiar with metrics like cash-on-cash return and the annual rate of return, these measures do not consider factors like inflation and the cost of capital. Christian uses a benchmark of at least 30% IRR over a five-year interval to determine whether a business case is viable. IRR takes into account future cash flows, including refinancing, and can be seen as the expected return minus the cost of capital. He talked about a 12-unit building that had a 45 percent IRR, and the timeline involved in the project, which included a three-year building phase and three years until it’s rented out to tenants. Cost-wise, the renovation would cost around $2.5 million, and the purchase price was $1.6 million. It is always important to have a contingency plan and backstops.
Maintaining an Optimal Debt-to-Asset Ratio:
Maintaining a 65% debt-to-asset ratio to have extra working capital in case of unforeseen expenses is recommended. This strategic approach allows investors to keep money liquid and take advantage of favorable market conditions. By effectively managing debt and optimizing working capital, real estate investors can maintain financial flexibility and seize opportunities as they arise.
Whether you’re a seasoned investor or just starting your journey, embracing these key principles will provide you with a solid foundation for achieving long-term financial success in the dynamic world of real estate. Continuously educate yourself, adapt to market changes, and leverage expert insights to refine your strategies and stay ahead in the world of real estate investing.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Tax Accountant
