Cashflow is meaningful

Cashflow is meaningful

I spoke to an investor 6 months ago who told me he was asset high but cash poor.

What did he average? He had bought several investments off plan, and several low yielding deals which he hoped would have good capital growth. consequently while he had several good assets on paper, these assets were truly costing him money each month, meaning he had a negative cashflow.

This can be ok, if some areas of your life, or investments, are making a positive cashflow to balance this. However this investor did not have this, and he ended up being forced to go back to work, and selling a associate of these low yielding assets for a loss – as he was put in the position of being a desperate seller – that is, desperate for cash.

It is crucial to always be aware of how important cash is when running a business – which character investing is.

The reality is that without cash, you won’t last very long. This may seem obvious, however it is very easy to buy assets, and then realize you do not have enough money coming in each month – which can leave you in a very difficult position. character investors must try and plan and prepare for all possible future events and market changes. This can include interest rate changes, economic changes or market sentiment changing, in addition as changes in your personal life which you may not closest associate with your character investing – such as promotion at work, or worse, being made redundant, or having children which can all make big changes to your cashflow as a whole.

So I would suggest, the most important aspect of planning, for a character investor, is not expected capital growth, historic data, cost of borrowing, or yields but is effective cash flow management.

Failure to properly plan cash flow is one of the leading causes for failure. I know how tempting it can be to overstretch yourself and put all your liquid cash into assets – and then due to an unexpected, or more likely unplanned for, poorly performing asset, find yourself over budget and desperate for cash short term. You then are looking to borrow cash, either by loans, or overdrafts at less permissible interest rates. However if this runs out you can be left with difficult decisions that are forced onto you by poor planning. This usually involves selling an asset, at a price below its value, as you are desperate for cash short term to sustain your character investing business overall.

Cash flow serves several purposes.

Firstly it is used for meeting normal cash obligations such as paying mortgages, buying costs, development costs and covering voids.

Secondly, it is held as a precautionary measure for unanticipated problems. This is the area that usually is forgotten by investors. A cash save should be obtainable for these unforeseen problems – this can be actual cash, or a flexible mortgage or overdraft, but must be obtainable.

Thirdly it is held for possible investment purposes. The term “cash” refers to those assets that are liquid and have immediate cash redemption value.

There is not a problem with buying a character or land that costs money in the short term ie a plot of land to develop on, or a character off plan, indeed this can be very profitable – but it is clear that this will not generate cash in the short term – and consequently you must make sure this is properly planned into your overall strategy.

I always think it is important to have a good level of cash generating assets – ie generating more money than the costs involved with borrowing and maintaining the asset.

This gives you a positive cashflow which can help balance out less well performing assets, or can be held in save for emergencies or future investments.

The other allurement of holding cash positive assets is that if you are ever forced to sell an asset due to an unexpected change in your specialized or personal life, there should always be need for cash positive assets, and consequently you should be able to sell this on comparatively easily.

For example, if a character development you are carrying out goes wrong or over budget, and you need additional cash – if you own a buy to let in the UK which is generating a gross provide of over 8% – or a net provide, ie after all costs, in any country of at the minimum 2% – then this should be attractive to other investors and you should find a buyer comparatively easily or be able to refinance this asset, which should generate cash quickly.

It is no surprise that when you go to the edges requesting more money, they want to know your monthly cashflow – they need to see from your projected monthly cash flow if you will have the capacity to repay the loans or mortgages.

So when you are forming your character investing strategy – ask yourself the following questions,

How much cash will my assets generate? How much cash is required each month? How much cash do other areas of my life require? And how much do they generate?

Ie. if you have a high paid job which you enjoy, which generates a high positive cash flow, or you already have assets generating additional cash on a monthly basis – you may be able to buy assets that will not generate money in the short term, as you can cover any short term costs, or unforeseen circumstances. You may consequently want to look at a longer timescale, and may go into character development, buy into a character fund, buy a plot of land – where you are comfortable tying up this money for a period of time, confident that it will rise in value, and you will have no short term need for this asset which could compromise the value.

If however you are pretty stretched already for cash on a monthly basis ie say cashflow neutral, you may well want to buy an asset that closest will generate cash, or at the minimum as soon as the mortgage, borrowing costs start ie a more traditional buy to let.

There are many ways to make money as a character investor – but financial planning is always meaningful to ensure your cashflow stays positive to allow you to grow your character investment business.

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