Cash Crunch!

Cash flow is the lifeblood of any business. If you want to stay in business, you need to have positive cash flow. In fact, the lack of adequate cash flow is the number one reason new businesses fail! I know this and am constantly preaching this to new investors.

To have adequate cash flow, you must buy your rentals at a big discount. Of course, I have done that and all of my rentals cash flow quite nicely. However, in addition to buying right, you must also plan your spending, especially capital expenditures. This month, I did not do this very well and I found myself in a cash crunch. It all started with the doublewide project I am completing. I have been doing this project with all cash and it is nearing completion. That has drained my cash on hand and I will be refinancing later this month to get my cash back. All of this was planned in advance. However, a couple of unexpected events occurred that I hadn't planned for. First, my wife was involved in a major accident. Her Mercedes was totaled and she needed another car. I am a big believer in not using credit for non-income producing assets. In other words, I always pay cash for automobiles. I spent some of my reserve cash on her new Jaguar (2002 Jaguar S-Type). Then, I suddenly had 5 new vacancies, all of which were unexpected. One couple broke up and moved out. Another tenant moved without notice to shack up with her boyfriend. Another long term tenant gave her 30-day notice because she has a new baby and needed a bigger house. Another excellent tenant got custody of a relative and needed a 4 bedroom house. I don't have one available. She gave her 30-day notice last month and moved out this month. Finally, I had to evict another tenant. OUCH!

None of these things by themselves is a big deal. I use cash flow to do projects all the time. The car accident was certainly unexpected, but again not a big deal. Likewise, in the rental business, you can be full one month and then have several vacancies the next month. However, combine all of these events in a single month, and my cash got very low. OOPS! If I had to do it over, I would not have put so much cash on the car. This would have allowed me to keep a better cash reserve level and allowed me to avoid the cash crunch altogether.

Everything has worked out fine. When you have a relatively large rental portfolio, money comes in all month long. Every time you rent another unit, you receive the rent and the security deposit. Also, almost every month at least one new tenant has their first month's rent or deposit paid by one government agency or another. When this happens, that money arrives later in the month. Also, when you evict a tenant, you must put up a deposit for the setout. If you do the setout yourself (I always do), you get that money back later in the month. All told, this usually adds up to another few thousand dollars each month.

The moral of this story is that you must always plan your cash flow carefully and ensure that you don't get overextended. This month was a reminder of that fact!!!