It’s hard to believe it’s been 24 years since I quit my day job and started my first business.
I had worked for a painting contractor while working my way through college, but when I finished school, I couldn’t really find a good job. So, I continued on for a total of 13 years, working for “the man,” before I started my own painting company.
I strongly believe that preparation is the most important step, and so, here are some of the things I did before giving my notice.
First off, I started doing part-time work on the side, in order to line up future accounts. I even subcontracted work from another contractor, just in case I didn’t have enough of my own work.
In the meantime, I saved up approximately $5,000 in cash, and I had just over $30,000 in a retirement account in case I needed it.
I lined up credit with all of my future suppliers to ensure that I could have good credit and have access to all the materials I needed. I set up a shop, bought a truck, got my insurances, and gathered most of the equipment that I needed to start out.
I didn’t burn any bridges when I gave my proper notice. To tell the truth, I’d rather go on welfare than go back to my old boss, but I wanted a backup plan. (By the way, my old boss was worse than Danny DeVito in Ruthless People.)
And finally, I went out on my own right at the beginning of the busy season.
As you can see, I was prepared, and I had a very successful business for the next 10 years. Eventually, I seriously injured my back and was no longer allowed to lift anything heavy.
The biggest problem, though, was that the business revolved around me. I hadn’t yet read the book The E Myth by Michael Gerber.
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Cash is King
The good news for me when I got hurt at age 42 was that I owned enough cash flowing real estate that it didn’t really matter. I just started working, using my brains instead of doing physical labor. I was fortunate that I had a real estate license and a degree in business, so it was relatively easy to go into real estate full-time (not just as an agent but also as a real estate investor).
As a full-time real estate investor, everyone knows cash is king, or at least access to cash is, especially when you need to move quickly to purchase “as is” properties from distressed sellers.
For me, the best tool to access cash at first was credit cards. Then later, it was lines of credit (HELOCS), and then eventually it become private money. Today, it even includes assets that can be quickly liquidated or borrowed against, like my note portfolio.
Shortly after I had gotten my real estate license, the company I went to work for made me shadow a seasoned agent. I felt so privileged to be mentored by the number one agent in the company at the time, and this guy was a real hustler. Not only was he at the top in sales, but he had 23 rental properties on top of that to boot. I’ll never forget when he was telling me that I should be like him and start buying rental properties too. Shortly thereafter (approximately 24 months later), he proceeded to lose all 23 properties to foreclosure and ended up filing bankruptcy.
You see, he had bought most of these properties with very little money down, and he had no reserves to use when the maintenance and vacancies quickly built up and snowballed out of control. He got to the point that he couldn’t even do the FHA repairs on the yearly inspections, and then HUD would cut him off. You can imagine what happened next.
It was this lesson early on that taught me if you want to do real estate, you need reserves. At first, I set aside approximately $2,000 to $3,000 per property. Later on, I still made sure I had access to cash, just in case I got hit with an uptick in vacancies or repairs. Just to prove a point, last year I got hit with approximately $50,000 in expenses due to termites ravaging one of my buildings. You just never know when something might come up.
It really comes down to having the cash available when you need it. Like I said at first, I used credit cards as a cash reserve, and over time I built a couple million dollars in equity that I was able to access via lines of credit. In the beginning, I used the lines to buy more real estate. I continued to do so until after I took an asset protection course at my local real estate group, where the attorney teaching the class pointed out that although the rate was lower, it was still too risky. It was then that I switched over to only using private money to fund my real estate deals, and I’d use my HELOCS for other high-yielding, more liquid investments, like short-term rehab loans or institutional notes.
What I liked about notes was that not only could I borrow against them (collateral assignment of note and mortgage), but I also had the ability to sell them for quick cash if I needed it. Notes can be sold much more quickly than properties, and yet they’re still backed by real state and require very little maintenance.
Let’s face it: Real estate is an illiquid investment, and what one does to maintain liquidity is extremely important. After all, real estate is a business, and all businesses need cash and cash flow to stay afloat — and any business can, at times, become cash-strapped.
So, for those of you on BiggerPockets who treat their real estate investing like a business, what rules does your business follow for maintaining some form of liquidity?
Weigh in with a comment!