by Ron LeGrand
I just spent two days talking to my master’s members. We discussed numerous subjects, but one topic that always comes to the surface when several people are in a room or on a call is:
Cash Flow Problems!
To address this issue, I’ll use the example of the client who seemed most concerned. I won’t give you his name, but it doesn’t matter anyway. His situation is quite normal and easy to get into. This client has attended several boot camps (some twice), and has taken initiative to get the proper education. For that reason, I know he’ll work it out and do well. I also know a simple marginal shift in his business will fix the problem within 60 days.
Here’s his situation and then we’ll discuss the solution… at least the one I proposed to him.
(1) He has 21 properties: 14 have lease option tenants; 7 are vacant and awaiting buyers.
(2) His negative cash flow is $10,000 per month and it’s only that low because he’s not paying himself.
(3) He needs $5,000 a month for is family plus $10,000 to cover his current negatives, which are largely payments on vacant houses!
(4) He quit his job and received a severance package that runs out in a few months, so he must fix this problem quickly to survive.
(5) He lives in an area where it’s tough to find tenant buyers with more than two or three thousand bucks, so he’s not able to live on the deposits alone as I taught him to do.
(6) He has $450,000 in equity in his properties. He is stuck waiting for buyers to close and cash him out!
That’s my best recollection of our conversation. I’m sure some of the details are incorrect, but not by much.
OK! The first step to solving a problem is identifying it! The second step is to layout the options. The third step is to pick the best option and the fourth step is to take action on the option you choose.
Step One : Identify The Problem
The outgo exceeds the income so the upkeep is becoming the downfall. More cash is going out instead of coming in. Part of his $10,000 negative cash flow is on mortgage payments. My guess is $5,000 is tied up in those payments.
The rest is expenses of running his business. Since he is full-time, that isn’t a bad number when you consider advertising, labor, auto, insurance, supplies, etc. Therefore half his outgo is to feed vacant houses and the other half is to find more houses he can’t afford to feed!
To summarize his problem…
He Needs To Generate $5K A Month For Operating Expenses, Plus $5K for Payments, Plus $5K To Live On!
He Needs A $15,000 Monthly Cash Flow Coming Into His Bank Account
… And He Needs To Do It Within 60 Days!
Step Two : Consider The Options
Now that we’ve clearly identified the problem, let’s look at all the possible solutions:
(1) Commit suicide
(2) Quit and let all the properties go into foreclosure
(3) Get a job to cover the deficit
(4) Cut off all possible operating costs
(5) Cash out of the 7 vacant properties quickly
(6) Get the lease/option tenants to refinance quickly
(7) Borrow some money to cover the negative
(8) Buy more lottery tickets
Step Three : Pick The Best Solution
All of these are choices he could make, but I’ll have to assume 1 through 3 are out of the question, and we can narrow 4 through 7 as possible choices since 8 is a long shot.
In this problem, a combination of solutions seems to be the best answer because each can make a combination. My advice to him was to do just that. Take several proactive approaches and one or more will work well.
Step Four : Take Action
I know one thing for certain …
A Little Bit Of Motion Is Better Than A Boatload Of Meditation
Solution (4) – Cut down on operation costs. That doesn’t mean go crazy and cease operations by sticking your head in the sand. It simply means to take a hard look at his outgo and see what can be eliminated, at least for now.
I suggested he quit spending a lot of money on advertising to buy houses for a couple of months, and only leave in effect those things that produce good results with minimum cost such as calling FSBO’s and driving traffic to his site.
Yes, I know you’re thinking this goes against my usual advice, which is….never shut down the buying machine. However he won’t shut it down, he’ll just slow it down! Once you’ve been in business a few months, deals will come to you from previous groundwork you’ve laid. It won’t kill you to cancel your ad in the paper or not to buy signs for a month or two.
The truth is none of that will matter if we don’t get this problem solved, because if he keeps going the way he is going, he won’t be in business much longer.
You Can’t Make Up a Negative Cash Flow By Doing The Same Stupid Stuff That Created It!
Does that mean advertising was stupid? No it doesn’t. It’s smart, but he must cut expenses so he can focus on fixing the problem. The biggest part of his problem is in solution #5.
Solution (5) – Seven houses with no tenants can only lead to cash flow problems if they all have a mortgage-which is his case. Some of his houses have payments over $800 a month! I suggested to him to create a guerrilla attack to drive in a flood of buyers to these houses quickly. Here’s my list of guerilla tactics…
A. Get the houses flooded with signs and the streets around them littered with pointer signs directing them to the property. Check on the signs twice a week. The pointer signs get you five times the calls as a yard sign.
B. Prescreen all calls for good or fair credit and get their information sheets to loan brokers immediately.
C. Mail flyers into the areas of the houses to tenants showing the “no money down.” Make sure you give a description of the house and its features.
D. Create a free traffic plan to flood his site with prospects.
“Life would be dull & colorless but for the obstacles we have to overcome & the fights we have to win”
You see, prior to our talk, he was looking for tenant buyers with several thousand dollars down and that’s the only way he intended to sell. The problem is the deposits he was getting were not large, and he accumulated too many vacancies waiting on large deposits. I can’t hold that against him, because I’m always preaching that a good business is one where you never have to cash out but when you do it’s a bonus, not a requirement to survive.
Of course, that’s based on the assumption you’re doing a few deals a month that produce $5,000-$15,000 in deposits or down payments. He wasn’t. Therefore, negative cash flow crept in.
After he implements the solution above, I suspect his problem(s) will evaporate within 60 days. He’ll need 30 days to get buyers into the system and 30 days to get them closed. Based on his numbers, that should put over $100,000 in his bank account and create stress relief…at least for awhile. Knowing what I know about his business, I told him in the future he needs to come up with a new sales plan. It’s pretty simple:
Cash Out The Houses You Can And Lease Option The Others
That may sound simple to you, but truthfully most solutions are when you’re not the one with the problem. If he cashes out of half his houses, he’ll have more than enough cash flow while still building a portfolio of lease options.
You attract cash buyers and lease option tenants the same way with the same ads. The only difference is the screening process. If they have good credit and no money, your exit is to get them a new loan. You will need to find a mortgage broker in your area who is familiar with all programs available. They are constantly changing.
If the buyers have money, they fit into the lease option program. If they have no money and bad credit, they’re outta here!
Sell Half For Cash, Lease Option The Other Half. Let Your Buyers Decide Which Half Is Which!
Solution (6) – Get current tenants financed. He has 14 tenant buyers sitting there waiting to buy, all he needs to do is push them. He should contact every one quickly and get their loan application to a lender. I’d call them up and make an appointment to go see them. If they say they want to buy, I’d get all the apps I could get and they’d be at the lender’s office the next day! If he gets 10 apps and five closes, problem solved! Cash flow fixed! All this can be done in thirty days.
Solution (7) – Borrow Money. This isn’t my favorite solution, but it’s certainly a viable one. There’s no sin in him borrowing money if he can on whatever assets he’s got for a temporary cushion. That’s what credit lines are for in any business. They are there to get you through low cash flow periods.
By implementing all or some of these solutions aggressively, his problem is relatively easy to fix and it won’t take long. By the time he gets this newsletter and recognized it’s him I’m writing about, he probably won’t even have the problem Some people don’t survive this kind of situation. They run and hide, throw up their hands and quit and blame the problem on everyone else but themselves.
When You Stick Your Head In The Sand, It Only Means Your Butt Is In The Air!
Frankly, some people are too weak to be in this business. No guts. No persistence. They believe everything they hear from anyone with a voice. Easily influenced. Easily upset. WEAK!
There are no businesses without problems, and you must understand part of running a business is solving a never-ending stream of them! As soon as you get one fixed, there’ll be another one to take its place. Some big, some small, and some will require a lot of time.
That’s what creates guts! The ability to solve problems and not cry about them! The more problems you solve, the more you’ll get! You’ll find that problems don’t bother you as much and they become easier to solve!
Tough-minded business leaders thrive on problems, probably because they know they’re strong enough to fix anything thrown at them. I solve more problems in a week than most do in a year!
To Your Quantum Leap And Extremely Positive Cash Flow…