Cash Can Be a Real Killer!

I'm a big fan of Dave Ramsey. Here’s a man who started in real estate in his early 20s and he tells a great story about how he's at the gas station in his new foreign luxury automobile hoping that his credit card will work. He can’t afford to put gas in it because the bottom dropped out of his over-leveraged real estate empire. He now believes for the most part that ALL debt is BAD debt and he does make a lot of sense. He should be, as we all should be, wary of leveraging our assets. 

There is, however, good debt as well. I believe the key to debt is to make sure you have plenty of equity in the deal to begin with and a short concise plan A and plan B to get out of that said debt. Of course, as a lender, I believe that short-term debt and low loans-to-value debt on real estate is a good and necessary way to grow and be successful in this business. I am amazed by two things when it comes to investors and money. Number one: the amount of people who want loans to buy, fix and flip properties that have no money saved to make payments or pay for closing costs. These are the investors who have been told they don’t need money to get into real estate (wholesaling is the only way). Or they just haven’t thought that far in advance, which is a great red flag to a lender. Number two: the investors that come to me for a loan because they have no cash to finish their project or they have used all their cash on other deals and this next one is the big kahuna. They can’t buy it because they are tapped out. Dave Ramsey talks about the importance of having an emergency fund and he is spot-on with that. Just as in your personal life, having an emergency fund in your business is just as important. Bad things happen to good people all the time. In reality, you control about 10% of what is going on around you. The rest is up to the environment, the market, the government and ultimately God. Good debt can grow your business and teach you to be a better business person. Learning to deal with debt keeps you accountable to yourself and your business. Having a plan A and plan B to get out of your debt should be a part of your business plan. Having debt is also a great motivator of placing time limits on each of your investments. Thinking through the timeframe of your purchase to sale and having the money to make your payments should be the framework of your plan. Anticipate that delays will happen, and items will come up in the project that you did not expect. If you use all your cash to purchase and rehab, how are you going to alleviate the issues? What can you do when that great deal comes along and you have no cash to even qualify for a hard money loan because your cash is wrapped up in another project? Is all debt bad debt? No, debt, when taken with knowledge, planning, and caution can put you and keep you on the road to success. Be prepared, be cautious, be smart!