Do You Know the Difference Between Cash Flow and Profit?

WHY MILLIONAIRES GO BANKRUPT

“That is exactly why we cannot loan you the money you need,” I said in response to a potential client explaining to me that he has over $20,000 a month going through his account.

Cash is king. If you have it, you stay in business. If you don’t… you don’t. A lot of money going through your account does not matter. In fact, that is not a good thing unless the money into the account is more than the money out. In this case, this particular client was doing very well financially on paper. He had a high net worth and several assets. The problem is, he set up the loans on his rentals to pay them off early and was spending all of his rent, and sometimes more than his rent, to make the payments. These rentals were profitable because income was more than the expenses, but he had no cash flow. The principal portion of your payment each month is a reduction of debt, so it is not an expense. In the long run this will prove beneficial, but it is risky. In this case, he was using shorter term amortizations to reduce his loan size quickly. All of his loans were set up as 15 year loans. Although, with the exception of a default, this is a sure fire way to speed up the loan payoff, I believe there are better ways to do it.

I made a similar mistake when I was really young. Whenever I got some cash in the bank I would want to invest it right away. After all, money in the bank is not working for me. I could earn much higher returns in other investments. I was buying houses at a rapid pace, and quickly became a millionaire. I was extremely proud that I hit that status long before my 30th birthday. The lesson I learned the hard way is that your net worth really doesn’t mean much. Net worth is simply your assets minus your liabilities. All my assets were in real estate. It was easy to buy discounted properties, so I increased my net worth each time I purchased a home. I am sure you have heard the term, “you make money when you buy.” That could not be truer. Although you make money when you buy, you can’t spend it until you sell. My model was almost exclusively buy and hold, so I never really generated the cash reserves I needed to withstand a problem. And a problem is exactly what I got. I was a millionaire and could not pay my bills.

I am a big leverage guy. I believe strongly that you need leverage to reach your potential. You will make more money and grow faster with leverage. Although I think you need to leverage people as much as money, I am going to focus on money for this point. If you have a lot of leverage in the way of loans, you need to make money to pay it off. Companies, and frankly our Government, end up spending all of its revenue to pay off debt; and although they are profitable, they are broke.

Once I shifted my focus to cash flow I was able to rebuild a much stronger financial picture. I rebuilt much more slowly and smarter. I still love and use leverage, but I am smart about it and stay diversified. I have access to cash if I run into a problem, and I use my assets to steadily pay off debt AND produce cash each and every month.

Land Pooling Policy, the Need of the Hour to Propel Master Plan Delhi 2021

Urbanization in Delhi has created many opportunities but at the same time posed certain challenges. One of the biggest challenges faced by the capital city due to rapid progress and development is burgeoning population. People from small towns and cities often migrate to Delhi in search of jobs. As a result the present population of Delhi is 1.7 crore. By the end of the year 2021, the population might reach 2.5 crore. The present infrastructure provides housing to only 1.5 crore people. How will Delhi Development Authority create infrastructure which fills up not only the existing deficit but also accommodates 80 lakh more people.

To save the situation from getting further aggrieved, a Master Plan Delhi 2021 is formed. The vision of this plan is to recreate Delhi in a manner that it provides homage to 10 million people. The biggest question which arises here is, will Delhi Development Authority alone turn the vision of MPD 2021 into a reality? If one looks at the record of DDA since its inception, it has created only 4.5 lakh housing units. How will DDA alone create 14-15 lakh housing units in such a short period of time? The answer is NO and therefore DDA has come up with a land pooling policy, more popularly known as LPP.

LPP gives farmers an opportunity to come up with small parcels of land and get them assembled together for redevelopment purpose. Once the land is developed, 48-60% of the land is returned to the land owners. Whole Delhi divided into 15 zones, of which six zones come under LPP. The greatest among these six zones is L-Zone, Dwarka. Around 4-5 lakh housing units can be developed alone in L-Zone.

LPP, if implemented can generate 20,000-25,000 hectares of land. The policy has the potential of redeveloping low residential areas and propelling the vision of both MPD-2021 and Delhi Smart City.

The benefits of LPP are multiple:

The policy will put an end to the land acquisition policy which will further prevent the increase in land prices. Land acquisition policy had no transparency and farmers were substituted with unfair compensation in exchange of land.

It will empower the public-private relationship. Under LPP, the role of DDA will be reduced to that of a facilitator. This will the boom the public-private relationship and improvise the development of the capital city.

Accelerate the mission of making Delhi a smarter city. LPP will redevelop the neighbouring villages like Dwarka, Narela, Bawana etc. These villages will be redeveloped in accord with the standards of MOD-2021.

Boom the employment opportunity in construction sector. As the construction work increases, need for labour work increases. Thus, LPP will create ample of employment opportunities.

Getting the Seller to Sign Your Agreement

We have been talking a lot recently about how to locate great deals. When dealing with individual sellers I recommend following these steps:

· Make contact (advertising)

· Speak on the phone and set an appointment

· Negotiate the deal

· Due diligence

· Closing

In the above list, closing refers to actually buying the house. There is no turning back after you close the deal. In the negotiation process there is also a close. What I mean by this is getting the seller to agree to the deal and sign the contract. I want to talk today about how to actually close the negotiations and get the seller to agree to your offer. This will only come AFTER you have verbally agreed to the offer.

For some reason people get scared of this. I have actually been in the house with other investors when they had a deal but did not get the seller to sign (they objected to their own offer), that is crazy. There are many rules, especially dealing with pre-foreclosures that give the seller time to back out after they sign. The right thing to do is to give them this time but your chances are much higher if they sign a contract on the spot. Always, always get a written commitment when you can.

I never bring anything in the house with me so once we are at the kitchen table and ready for the paperwork I go over all the terms we talked about again and ask them if I should go get the agreements. It goes like this:

Investor – “I think we can agree to those terms. So you want to sell us your house for $90,000 cash and you want all your money within the next two weeks. Did I get that right?”

Seller – “Yes that is what we agreed to”

Investor – “I am sure that will not be a problem, does it make sense for us to go ahead and write this up on an agreement?”

Seller – “yes, do you have one?”

Investor – “I normally carry a few in the car. Do you mind if I go check?

Seller – “no”

Investor – “I will be right back. When I come back should I just come right back here or would you like me to knock again?”

Seller – “No don’t knock, just come back here.”

At this point you will go get your contract and come back in. Sit down and pull the agreement out. NEVER call it a contract because that word scares people. Go through the agreement and complete the blanks BUT ask the seller for input on every line you can. For example you would say “How is your name spelled? And is that how it is listed on title? What is today’s date? What is the address here?”

Even if you know the answers, ask as many questions as you can so they feel as if they participated in putting the agreement together. Once the agreement is done say out loud “it looks like I put my name here” and sign it. Pass the agreement and say “it looks like you put your name here”, at this point hand them the pen.

They may or may not read it. If they start to read it and it takes a while you need to become very reluctant. You will want to start asking questions like these:

“How is the school system?”

“When was the last time the roof was inspected?”

“How about the furnace?”

“I noticed a problem with ___________, how long has it been like that?”

As you ask questions, especially ones about the house, they will want to sign it quicker. They don’t want to lose you as a buyer. I am OK putting pressure on them like this because they have time after I leave to review everything. You might even tell them to call you the next day if they have any questions about the agreement.

Be upfront with them as you go through the agreement and explain things that they should know, like the inspection period, what they can expect in closing costs, etc.

After you leave get your financing lined up and do your inspection and due diligence. If anything comes up that will cause a delay or a reason for you not to buy the property, call the seller right away. It is also a good idea to call every week or so leading up to the closing letting them know you are excited to work with them. Give them updates on the progress with closing.

I don’t want to hear about anyone going into a house negotiating a great deal and not getting an agreement signed. Follow these steps and grab your next great deal.