Finding the Money
Money has several aspects.
First, be prepared to save and reinvest the money you make. You need to deny yourself in the short term to make good in the long term.
But deferred gratification alone is almost never enough. Much of your wealth accumulation will be illiquid. (In other words, it can’t easily be converted into cash.) You need to find other ways to make the money equation work. You want to maximize the value of not only your time and energy, but also of your own limited pocket book.
In most cases, you’ll need to get a bank or some other lender to buy into your plan. Real estate is increasingly a numbers game, but some banks still bet on individuals. Similarly, individuals whom you approach to put up equity money are more apt to be betting on you personally. Behind the numbers, in other words, it’s still a people game. As a Huntsville, Alabama-based developer recently put it, “When you are starting out with little money, trust is your currency.” That holds at all stages of your career. Lose trust, and you are in trouble.
Once you get hold of someone else’s money, you have to dole it out like hen’s teeth. Why? First, it’s embarrassing and problematic to run out of money. In addition, every time you go back to the well, you will 1) decrease your own control over the project, and 2) underscore in the minds of your partners that your projections weren’t accurate. (No matter how good the excuse, there is no substitute for success.) You also may have to considerably reduce your equity stake to bring in new money, which means that you’re going in exactly the wrong direction.
Basically, you have to have adequate financing at an acceptable cost. Without it, you can’t get started. Most likely, you have only limited cash of your own, and you need other people’s money. But this isn’t always possible. There are times when capital is readily available, and other times when—no matter how good your idea might be—the financial spigot is turned off.
Despite overall consolidation in the financial services industry, there are still multiple sources of capital out there. Mortgage brokers can help you figure out which lenders are most active in the market at this particular time, and for your particular type of property. Keep in mind that the cheapest money is not always the best. The timing of the repayment, the security you have to put up, or the amount of the loan may be more important to you than the interest rate. Also, if you get in trouble, having a relationship with an experienced lender—who may give you time to work out your problems—may pay off in a big way.4
Managing the liability side of your balance sheet is a theme we return to repeatedly as we consider the arc of a career in real estate. After all, this is a capital-intensive industry, in which most of the cost is borrowed. As a result, more than half of your rental income is apt to go to your lender. The amount you borrow, the interest rate, and the terms for repayment (that is, the principal payments) are the major determinants of your cash flow. It’s all too easy to focus primarily on the asset side: that is, the price we pay for the property. But almost equally important is the liability side: that is, how we finance it, and at what cost.