When I talk with (and when I've worked with as well!) newbie investors, one of the things they have difficulty calculating is how much cash they have available to invest without putting themselves through a liquidity crunch. I thought I'd share some of my techniques to avoiding a liquidity crunch below.
Before you can start investing, it’s absolutely vital that you sit down and figure out what your ability to invest is. This largely involves sitting on the floor, creating numbers from the top of your head. Then, you put them on a dartboard, and then look for a dart. Get your dart, blindfold yourself, and throw the dart. Wherever it lands is the amount that you’ve got available to invest.
No! Of course not. But that’s basically the approach that people use to plan their investment. “Oh, I think I’ve got this much available,” they say. And then they get into a project and find themselves spending much, much more than they had ever planned on, or unable to spend nearly as much as they thought they could. I need you to repeat after me: “I will be honest with myself about my finances.” Go on. “I will be honest with myself about my finances.” And again, “I will be honest with myself about my finances.”
Being a successful flipper involves knowing where you are financially, and what you have available to invest. There are three big questions:
- What are my monthly expenses? Use the past three months’ average expenses
- oHousing: rent/mortgage
- oHealth insurance
- oEntertainment costs
- oTransportation costs
- What is my salary every year?
- How much of that is take-home pay/how much goes to my savings account?
- What are my liquid assets? What are my non-liquid assets?
- What is my rainy day fund?
- What amount do I need to save up for a six-month cushion?
- What amount do I have left over, with liquid assets minus cushion?
- What amount do I have to invest?
Finding your total $$$ available to invest: monthly salary - taxes = take-home pay
Take-home pay - monthly expenses - monthly savings = monthly liquidity, what you can pay on interest payments
(liquid assets - six month-cushion rainy day fund) * 80% = amount able to invest in real estate
Be honest with yourself. Estimate that you have less money available, not more. Be honest with yourself! Now you’ve gone through and gotten an idea of the amount that you’ll have ready to invest in flipping. This number is crucial to your plans. It lets you know, before you approach any project, whether or not you’ll be able to fund it.