Ten Steps Ahead - Investor Preparedness

[Nate Larson]

During these current and unprecedented economic conditions, nearly all businesses have suffered some sort of financial strain, however, I'm here to tell you that it doesn't have to be that way.

We've all heard the mantra before: "keep 3-6 months in reserves".  Many of us practice this, but most don't.  Unfortunately, business owners seemingly disregard this basic principle to the greatest extent possible.

As a commercial lender in today's age, I have the privilege of being able to see it all.  I get to see what works, and what doesn't.  What never works is underfunded cash reserves.  The only substitute to underfunded cash reserves is cash available, which is my personal favorite.

Now before I begin, I want to make a couple points very clear.  I'm very much a proponent of cash flow, and most of the time, I even prefer it over cash itself.  However, cash cannot be forgotten about.  Like anything, if you pay attention to it, it will generally stay the same or improve.  If you neglect it, it will neglect you.

The funny thing about all startup business owners in the United States is that they ALL think they're going to "make it". Now, while this is a good mindset to have and it is good for a person's ego and good for those who feed off of positivity only, it's even better for those who feed of off statistical data, rational thinking and common sense - the wolves.  Often times, you won't catch a wolf in plain sight.  They'll be thinly veiled in sheep's clothing ready to pounce.  Will you be ready?

One of the most frustrating things I see daily in the way that business owners run their businesses is that they do not have reserves.  After all, the general population is supposed to have 3-6 months worth of reserves on had in case they fall on bad times, but why do business owners think they're subject to a different set of rules?

Now, like never before, the basic rules of finance cannot be overlooked.  You can't leverage to the hilts and expect your business to grow without down years taking you back to reality in-between.  They're GOING to happen, and it's up to you whether you're ready for them or not.

Here's the good news: the only thing certain is that we are, at some point, going to run into a point of uncertainty.  How you're positioned during a time of uncertainty is ultimately what defines you as an investor, a business owner and entrepreneur.

The biggest problem I see with most business owners is that they dive head-first into a situation thinking that "if this goes right, this goes right, and this goes right, we're going to make a killing."  What you want as a business owner is staying power.  You need to assume the absolute worst.  You need to assume that you're going to be out a tenant for 6 months, that you need to replace a roof after 3 months of ownership, that you evict a tenant after 6 months, that you go an entire winter making thousands of dollars of expensive improvements with only one renter.  And then, to top it all off, you've got to assume someone runs into your duplex with their car.  These are my personal experiences with my first-ever residential real estate property.  Regardless of the circumstances, I never took my eye off the prize, because I knew I was covered with reserves.  I didn't go into the deal over-leveraged, and any improvement I did make, improved my loan-to-value that much more.

Some might say, "dude, you're stupid for not leveraging and buying more".  Yeah, I could have gotten more out of my equity.  After I refinanced a couple years later, I took a fixed rate line of credit for $105,000.  The property value was/is $150,000-$160,000.  Was there more I could have leveraged?  Absolutely.  However, the point is, when you're doing your first deal, you need to go into it with all of your bases covered.  Be fail-proof.  Don't assume the positives.  Assume the worst.  IF you can make it work with the worst case scenarios, then, only then, you've become an investor.  Otherwise, you're just speculating.

Happy Easter All!

Banker Nate