Have you ever heard the old adage “If you find yourself in a hole, stop digging?” Well, that’s great advice, especially for real estate investors because if you are in this business any length of time there’s a good possibility you’ll find yourself looking up from hole.
So what do you do about it?
That was a question I got asked this week from a Zoom panel in which I was a guest speaker for the company Simple CFO, which offers fractional CFO services for real estate investors. The company was started by David Richter because he saw that most investors were great at putting deals together, but terrible at keeping their books, which ultimately leads to not knowing their numbers in regard to their overall business financials.
The CFOs there are awesome because they speak both realestatese (you know, the language of real estate investors) as well as QuickBooks, which most of us are not fluent in. And they are able to take what we do, translate it into accounting and put it where it needs to be so that we investors can see how our businesses are doing on a daily basis and not just find out if we did good or bad at tax time.
I have been a client of Simple CFO since 2020 and they brought me on to share my experience as a client as well as to give the CFOs some insight on how to better relate to and advise their other investor clients.
One of the questions that got asked was what an investor should do if they dig themselves into a hole on a rehab. This led to a great conversation that I believe needs to be talked about more.
As investors, you can find yourself in a financial hole in many ways. They can be singular holes, like one rehab is over budget, or they can be as big as you are worried that your company is about to fold. In either of these cases, the very first thing you do if you find yourself in a financial hole is stop digging.
On a rehab, this means you’ll have to revisit your scope of work and decide what is needed and what is not. You may have been a little too HGTV on the finishes and you need to take it down a few notches. It may mean you need to fire a contractor that is taking too long or coming back in wanting to invent things to add for more pay. It may mean that you need to take on the role as project manager/ general contractor to do away with that extra expense. Or, if you are capable, sometimes you have to jump in and do some of the rehab yourself.
In these cases you are hoping to save your profit or break even at the very least. But sometimes there is no stopping. You have to keep digging.
This happens when you flat out under-figured your rehab or you ran into an unexpected issue. And in this case, you can’t just stop and leave the house unfinished. You have to move forward. But you need to be looking at everything you can do to minimize the further cost.
This is not a time to be an ostrich and stick your head in the sand. You need to face it head on and be aggressive with getting it finished as efficiently and economically as possible.
Then when it’s finished, the most important thing you can do is perform an autopsy of the deal. Ask yourself what went wrong, why did it go wrong and what can you do to control it in the future. This will allow you to learn from this scenario and make sure not to make the same mistakes again.
Now if you are in a hole so big that you think your company is going to fold, the to-do’s are not all that different. And trust me, I know this for a fact because we lived it in 2019.
What happened was I decided we needed to double the amount of deals we were doing. So I bought a bunch of houses, only to find out that we didn’t have the capacity to get them worked on and resold in a timely manner. As such, we were bleeding money left and right on holding costs and mortgage payments. As a matter of fact, at tax time, we found out I had spent $72,000 more than we had brought in.
That’s a big loss!
So what did we do? We stopped digging! The first thing we did was we stopped buying until we got a bulk of our houses that were sitting sold. You see, we had a bunch of equity in those houses, but you can’t eat equity until you sell them. So we had to make a concerted effort to get those finished and sold before we could look at doing anything else.
Next, we went through our finances and did an expense analysis. This is where you look at everything you spend and decide if you use it or not, if you need it or not, and does it produce revenue or not.
Through this process we were able to cut office spending on lots of services that we were subscribed to that we really didn’t use. We also looked at our marketing and found we had entire mailing campaigns that were producing no leads. We eliminated those and those markets and concentrated on our one best area. This allowed us to be very efficient and effective on the buy, rehab and sell sides because we knew that market and the contractors surrounding it.
By eliminating all those extra costs, concentrating on one market and making sure we got our inventory ready before moving forward, we stopped the bleeding and stopped digging ourselves deeper into that financial hole. As a result, 2020 and every year thereafter has been great financially.
So the lessons from this are simple: if you find yourselves in a financial hole, stop digging and aggressively come up with solutions on how to get out.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.