Financial experts have constantly reminded us that it is not how much you make, but how much you actually save. This is particularly true in the world of real estate investing. You are not judged on how many deals you close, or even how big of a check you get at closing; you are judged on the bottom line that each deal produces. Closing a deal is the culmination of weeks of effort and hard work. There is a natural temptation to treat yourself and splurge on items you have had your eye on. It is important to remember that you are running a business, and checks you receive at closing are not bonus checks. Closing real estate deals is great, but only if you know what to do with the money afterwards. Here are some things that every investor needs to do after closing a real estate deal:
1. Pay off expenses: It would be easy if the check you received at closing represented the bottom line for your business. While all of the closing costs and fees are taken out, there are still more items that need to be addressed. If you closed on a rehab, for instance, you need to cover all of the carrying costs. These include the interest repayment on the money you borrowed, insurance, and final utility payments. It also may include a final payment to a contractor, or anyone else that worked on your property. If you put any materials on credit, you need to pay them off as soon as possible. You also need to keep some money in reserves to cover the income tax payment that needs to be made if you don’t reinvest the money. Well before you close, you should have an updated ledger of all the expenses and the payments that are due. This will help you dip into your check as soon as you receive it.
2. Business growth: How did you get the lead that you just closed? However it was obtained, you should allocate some money to developing that source. If it was a mailing, you should re-mail the list or see if you could add additional names. If it was a networking source, you should send them a gift card or do something to show you are appreciative. This is the first area you should focus on if you have excess closing funds. Closing a deal is great, but you want to keep the momentum going. Often times this means spending money on developing your business. Don’t wait to make the improvements to your website. If your real estate license needs to be renewed, don’t put it off until the next closing. At least some portion of every deal should go towards growing your business in some capacity. If not, you will become stagnant, and there will not be a new check coming in for some time.
3. Reserves/capital: Every time you receive a check, you shouldn’t race to see how quickly you can spend it. Sometimes the best thing you can do is nothing at all. As boring as it may be, every investor needs reserves. These reserves can be used for a rental property you have, or simply until the next good deal comes your way. They can be used to jumpstart your marketing on a rainy day, or to make unexpected improvements to another property you own. You should always have a minimum amount of cash on hand at all times. If you don’t, you are playing with fire. In business, and real estate, cash is king. There are some deals that can be acquired based solely on your ability to make a cash offer. If you don’t have the closing money earmarked for anything particular, it is best to put it in the bank until something you need comes up.
4. Take a draw: You should predetermine how much of a percentage, or draw, on every deal you are going to take. It is important to draw the line at this number, and to not exceed it. You may have hustled to close this deal and worked harder than you thought, but it doesn’t mean you should take more. There is a certain amount of discipline needed to be a good investor. It can be tempting at times to give yourself a treat, but you can’t until your business is firing on all cylinders. Take enough to cover your household expenses and maybe a small reward for yourself, but that has to be it.
What you shouldn’t do with a big check is buy things that won’t give you a return on your money. Paying expenses is a necessary part of the business, much like reinvesting for growth. Before you make any personal expenditures, you should ask what the return will be. If you are not getting anything of value for the expense, you shouldn’t make the purchase. As your business grows and more closings occur, you will have more opportunities down the road. Until you establish yourself and your business is self-sufficient, you need to treat every check you get at closing like it is your last one for a while.
