Before you make plans to purchase commercial or income-producing real estate, you have to do what is necessary to look like a good prospect for a mortgage loan. Most likely you will be financing your first purchase, and probably all of your later ones, through a lending institution.
In order to get mortgages and lines of credit, you will need to convince a lender that you are a worthy risk. This means that you will make your payments on time and take care of your properties. You also have the experience and financial savvy to make good choices in what to buy and how to make your venture profitable. Your ultimate goal is to increase your net worth, cash flow, and cash balances while reducing your debt load because that is what lenders like to look at. You need to look good on an income statement and balance sheet.
Think Like a Lender
First you need to take a good, objective look at your existing financial picture. Once you understand where the problems lie, you need to find out how to solve them. It helps to know how to read and create financial reports including income statements, balance sheets and cash flow statements. It is a good idea to use a program such as Microsoft Excel, Open Office or Google Docs so you can create spreadsheets and keep track of your income, expenses and budgets.
If you need help understanding the basics, you can pick up a used accounting textbook, take a free online course, download free sample financial statements from various websites or take classes at a local community college. It’s important to shake off any feelings of fear, boredom or disgust regarding financial topics that may be lingering from the days of your youth. If you want to make money, you can’t avoid dealing with numbers so you might as well learn to enjoy it.
Once you have taken a hard look at your financial picture, it’s time to sit down and work out a strategy for improving it. Lenders do not look kindly at big revolving debt balances, such as credit card debt. They are not too happy about large car loans either. They are more forgiving of home loans. It’s not that they expect you to be debt free, but they do want to see ample cash flow and liquidity, such as bank accounts and non-retirement stock or bond funds to balance out your debt load.
Mortgages on existing income properties prove that you already know something about real estate investment, and that’s great, but be prepared to furnish income statements or cash-flow statements on any properties you currently own. Lenders will not like to see rentals with unusually high expenses or high vacancy rates, as this indicates either poor management or an unwise investment.
How to Improve Your Financial Picture in Three “Easy” Steps: Pay Off Debt, Save Money, Make Money
Paying off revolving debt is a first priority, and doing so requires discipline and sacrifice, but the results are well worth the price. And perhaps the greatest gift from this sacrifice is, once you’ve brought the balances of your credit cards and unsecured loans down to zero, you have your monthly payments available to pay yourself. And hopefully this will result in a higher bank balance.
Of course, even if you are debt free you won’t get the nod of approval if your income is too low or if you have no liquidity. Paying cash for everything will prevent credit card debt from building up, but spending all of your earnings each month won’t get you into investor mode. So after paying off debt and putting money aside by reducing your spending, the next step is to increase your liquid assets and your income.
Now you must brainstorm ways to improve your income and cash flow, whether it is by downsizing and living below your means, getting a second job, doing freelance work on the side, renting out your big house and moving your family into the guesthouse, or getting your dog into a lucrative movie contract. Perhaps the last scenario is not realistic, but it’s good to consider all possibilities.
Also, consider selling expensive unproductive assets such as seldom-used boats or recreational vehicles. It’s not that you can’t have fun anymore, but try to think of cheaper ways to do it. Living a life of luxury while sinking into a financial hole is not indicative of a financially savvy investor. So think seriously if you need that boat, RV, luxury car, vacation house or more than 2000 square feet of primary residence for a family of four, especially if these “assets” are dragging you down financially.
If you find yourself on the receiving end of a financial windfall, such as inheritance, legal settlement, insurance payout, parental gift, sale of existing property, or finding a rare antique in the attic, lock these funds immediately into a secure account, preferably a term account without easy access, to avoid temptation. Of course, first put aside whatever amount you will need to pay necessary taxes on the sudden windfall.
Combining Two Goals into One Job
An excellent way to earn extra cash while also learning about commercial real estate investment is by becoming a property manager. Even if all you do is manage an apartment complex in exchange for free rent, this is an excellent way to save and earn more money, and even better, get valuable experience in what it takes to own and manage income real estate.
Summing It Up, Literally
Make it a habit to review your financial statements on a monthly basis and note your successes and failures. Then devise strategies to solve whatever problems or weaknesses emerge. You will know you have reached your goal when you have gained enough liquidity to make a 25-percent down payment on a property without risking your emergency and retirement funds. You must also factor in loan fees, appraisal fees, escrow or closing fees, prorated taxes, and all other expenses that will be exchanged during a purchase. You will also need some money left over to take care of potential repair bills. This could add up to some serious cash.
If it seems like this goal is a long way off, just keep moving forward and don’t give up. You will have slips and falls along the way, but successful investors know that patience and persistence are the keys to overcoming multiple obstacles on the pathway to success. Improving your financial picture is the first step in a long journey toward financial prosperity and independence.