As a real estate investor you know that you can never have too much cash.
What if I could present an argument to the contrary. An argument that demonstrates that real estate investors, especially new investors who have ready access to cash, almost always earn fewer profits then an investor who is not so cash rich.
Let me explain…
I received a call from a client yesterday sharing with me a recent contract he was in the process of negotiating with a seller. Overall, the contract is solid. The property had only been on the market for 3 weeks and so the client was very happy with the offer. Yet, the first words out of his mouth when discussing the profitability on this deal was, “I spent too much on the renovation because I had the cash!”
Now the only reason he would even volunteer this information is because I have made it a crusade with clients that the tendency is — if you have the cash available — YOU WILL SPEND IT! It is as simple as that!
While it seems like simple economics or prudent budget control, in my experience it goes much deeper than that. It goes to our egos!
I believe that we are emboldened when we have funds for our deals. Especially if those funds are not tied to mortgages from lenders, who insist on purchase price ratios or draw schedules. In short, when we have access to funds that have very few controls placed on them, we are compelled to spend it.
I have witnessed this on the buy side (especially during the market run-up) and am still witnessing it in many renovations; in every case profitability – whether in terms of cash-flow or sales profits – always seem to be lower than for the investor who does not have ready access to excess cash.
In fact, it amazes me how quickly cash constrained investors must learn to “Profit when they Buy,” meaning that their offers ensure a profit. In addition, they must work hard, and I mean hard, to get their renovations completed on budget, because they don’t have other choices!
Getting back to my client… he will make a respectable profit — not what he had planned on, but a profit none-the-less.
Has he learned a valuable lesson? I hope so!
How about you?
Photo: Dan4th Nicholas