Getting Your Financial House in Order

Welcome back to Raising the Flipping Bar. I'm Derek Marlin, your host, CEO and founder of Elevation. So in our last episode, we talked a lot about my background, and I think that was kind of important to help you learn about me moving five different states 15 different times. It was the blending that I have from the finance side of things and the real estate investing.

Fast forward to my professional career, which started out in professional sports marketing, working for the Broncos and CBS television, and then jumping into real estate investing with the crash of 2008, nine, and 10. That's when I first started buying rental properties. So it all kind of paints the picture to how are we going to successfully set the stage.

For property redevelopment or fix and flip, as most people call it. So in today's episode, this one is titled Getting Your Financial House in Order. And this one is really important to me, kind of again, leaning back on the finance background. But from a business strategy standpoint, it's super, super important to have both your personal and your professional financial house and order.

So really, what does that look. First you want to jive into, or really first you want to jump into your assets. So whether it is your primary residence, whether it is rental properties that you might own, whether it's commercial properties, any of those properties or those hard assets that you can tap into.

You want to have that as kind of your first, um, you know, line of defense for the assets that you can use to help fund your fix and flips. Then you want to jump into business ownership or assets that you might have that have value that you can leverage. In addition, you wanna look at retirement accounts.

So you can have self-directed retirement accounts, you can have 401ks, you can have IRAs, you can have taxable brokerage accounts. Those are all great assets that you can use to either become a, you know, more qualified borrower. Or use that as assets to acquire these fix and flip properties. You then really want to dive into your liabilities.

So let's think about what mortgages do you have on your primary home? What mortgages do you have on your rental properties? What do you have from, you know, student loans or an education standpoint? Auto loans. Credit card loans, medical debt. The way that I always say it. There's debt and there's leverage.

So to me, leverage is a healthy use of essentially somebody else's money. So you can shrink your down payment and you can increase your returns done in a responsible investing nature. Debt, in my opinion, is having that consumer debt. So ideally, and I know we all gotta start somewhere and everybody is at different points of the financial spectrum.

But you want to hopefully not have credit card debt. You wanna hopefully not have too much student debt. Um, ideally not medical debt because that's gonna really inhibit your ability to A, be a good borrower, and B, run these flips in a profitable manner. You want to jump down into having reserves. To me, this is something that, that actually was a game changer personally, which is I said again, I'm starting to invest in 2008, nine and 10, and so I said, oh my gosh, what happens if I'm totally wrong and everything just completely goes to hell and hand basket?

Well, with reserves both personally and professionally, that can really help you one feel more c. And two, just have your financial ducks in a row. So the way that I look like to look at it is from a personal standpoint, I wanted to have anywhere from six to 12 months of your monthly expenses set aside liquid cash and a savings account.

And I know some people are probably gonna listen to this and say, holy crap, how do I, how do I do that? How do I get started? I've got that debt. Great. Let's try to get that debt paid off first. Let's then start chipping away at putting together your savings. But ideally, six to 12 months is. For me, business then comes second, which is how do I have reserves to help run my business?

Not every flip is gonna come down the pipeline perfectly. You're not gonna be able to roll from one property or from four properties into the next. So there's gonna be times where cash flow is not great. So in my opinion, three to nine months is a great number to start with and hopefully end with for business reserves to be on hand.

Then my biggest kind of advice and guidance is just start. Like I said, it'd be great to have 12 months of personal reserves and nine months of business reserves. I didn't have that when I started, but I got to six months pretty darn quickly. And we actually now personally stand at 18 months of reserves, um, which has come in really handy in 2023.

It's definitely been a, a rocky start to, to this first half for this part of the year. So build those reserves. Those are super, super key in my opinion. Then we start to talk about. Financing a deal. So there's really four different ways, in my opinion, that you can finance a deal and that you should again, have your financial house in order.

And what I'm gonna do is I'm gonna lay this out from the least expensive, which essentially means the most profitable to the most expensive. Technically the least profitable on a raw dollar amount, but when you actually talk about it from a percentage basis, it'll almost be the inverse. So by borrowing money, even though you're paying a higher interest rate, your returns can actually be greater.

Let's jump back into. The first line, which is cash. Obviously there's no interest with cash on hand that gives you the best deal. That is you not paying interest every single month, but you have to have those raw dollars to purchase the property. So if it's a $400,000 property, you've gotta have $400,000 in the bank and then you've gotta have renovation money ready to go.

So definitely the best way to to, to go. But not everybody has 400 grand start. So then you go on to level two, which is lines of credit on average. And again, we're recording this first season in 2023 for some context for you guys out there. It's our audience is you're gonna be paying between five and 7% for lines of credit.

And, and you know, somebody might ask, okay, well great, what am I, you know, borrowing against? So you could have an existing business that has cash value. That you could borrow against. And again, you're paying five to 7%, um, on those rates. You can also have a stock and a bond portfolio, and that's how we invest in Elevation.

And so the great thing about that is that you've got your stock and bond portfolio. That is typically still making you money on this side of the equation, even though you might be borrowing on this side of the equation. So in essence, if you can hopefully outperform the interest rate that you're being charged by your bank or by your brokerage, you're actually coming out ahead too.

So essentially that's almost like cash right now. Again, people are paying about five to 7% on their line of. Against their stock and bond portfolio, and most banks and most brokerages will give you between 50 and 80% of the value of your portfolio. So let's put some numbers to that. If you've got a million dollars in value of your stocks and bonds in your portfolio, banks will give you the ability to be a cash buyer for between 500.

And $800,000. Again, that should get you hopefully in, well in Denver, maybe one flip, um, a lot of other markets, that's gonna give you the ability to do two, maybe three flips at once. So that's what we use at Elevation. That's a great way to help grow your business, pay reasonable interest, and not break the bank, but also not have, you know, a million bucks in cash just sitting around.

Then kind of that next level are home equity lines of. Those are when you've got equity in a property, whether it's your primary residence, where you live, whether it's rental properties, that is the difference between the mortgage that you've got and the value of your property. Again, most banks will lend up to about 75 to 80% of the value of your property minus your debt.

So for most people, especially, you know, I'll give you kind of my personal background. We bought our home that we're in right now in 2000. Obviously hit the jackpot. Got super lucky. We knew it was low, we didn't know it'd be the, the absolute bottom. Um, and our home has, has increased in value significantly.

Um, but we've paid off our loan a lot quicker, so we've grown a lot of equity in our home. So if we were to take out that equity, we have the ability to borrow several hundred thousand dollars against our home in that five to 7% interest range, which is great cuz a lot of times we can use that for your renovation.

Um, you can also do that against rental properties. So let's say you own a condo free and clear, or you've got a mountain property that you've got a couple hundred thousand dollars in equity in. That's another great way that you can borrow against that. And use that for your five to 7%, um, payments that you're gonna make.

Again, super reasonable. There's kind of two other ways that you can fund and you can start your flip as we again try to get your financial house in order. And the next one is borrowing money from private investors. And so a private investor is typically friends and. They are people that know you, trust you, love you, and, and see you as a way for them to make some returns and, and a good return on their investment.

Get you started, you're paying a little bit more than lines of credit. You're not paying quite what, uh, what we'll get to here in a minute, which is called hard money borrowing. Um, on average in the current environment in 2023, people are paying between eight and 9% for private. But the great thing is, is you're not paying points.

And so really what that boils down to is our fourth level of investing, which is hard money lending. And so from an interest perspective, you're gonna be between about 10% and 14%. Now, I know some people say, oh my gosh, who would pay 14% interest? A lot of people when they start out are paying 14% interest.

And the reason being is because hard money lenders are typically having people bring between 10 and 15% of the purchase price of a property to the table to fund a flip. So again, let's keep the math really simple. Let's say that we're buying a property for $500,000. Instead of either having 500 grand sitting around in cash or having a line of credit that's probably worth seven or 800,000 and gives you the ability to borrow $500,000.

You have between 50 and $75,000 in the bank. That's your down payment. Yes, you're paying interest and you're paying a large percentage of interest, but on a cash, on cash return, which is how much money are you investing and how much do you make, you're actually making more money than if you funded the whole thing in cash.

So again, you're paying between 10 and 14% interest. Hard money does get a bit more expensive, and the reason why is for what they call. Points is a percentage of the loan of what you're borrowing on day one. So again, if you're borrowing $500,000 and you are paying one point, you're gonna be paying an extra $5,000 in fees at the closing table.

If you're paying two points, that's obviously $10,000 and that is definitely hurting the profitability of the project. But again, it's, it's really the only way that a lot of people get started. So those are kind of your four tiers or your hierarchy of how do you fund a fix and. Um, along with that, ideally you want to get a personal financial statement created, which helps you really outline all of your assets, all of your liabilities talks about your net worth, talks about your liquidity, which is, is essentially kind of, you know, simply defined as how much access to quick cash do you have.

So, Pay for the purchase, pay for the rehab, make your monthly payments, have a contingency plan if something doesn't sell, you know, in the first weekend like it used to. Um, so you want to have a personal financial statement ready to go that you can provide to either your bankers or your lenders. You also, in my opinion, you really want to get pre-approved, approved with between one and two lenders.

So ideally, you know, it's great to have kind of a local hard money or private lender. And then it's also good in my opinion to have more of a national option because a lot of times, you know, if you go with a person you build a local relationship with, which is great, and they maybe only can loan out to six different people and you find this amazing deal and they say, oh shoot, sorry, I'm tapped out.

You want to have that backup. A lot of times the national companies, while they've got tons of money to lend and it gives you the ability to make quick, you know, snap second decision. Um, the terms might not quite be as good. It's not quite the relationship based lending that you might want to, you know, work with, um, as you build your team of investment professionals to help support you.

So that really outlines kind of where do you get your money from and how do you get your ducks in a row to, you know, make sure that you're the best possible borrower. After that, you want to get into what I call building your professional team. So you want to line up and make sure that you have a CPA or certified public.

To me that is critical because it's not necessarily always what you make. It's not only the profitability, it's what you keep and ideally pay the least amount of taxes on. Nobody's looking to skirt taxes. Everybody's, you know, paying their share for whatever tax bracket that you might be in. But in the simplest terms, if I can pay less by using smart tax strategies because I've got a great CPA to help me structure that, or more importantly, make good decisions before I get into 'em, that is of paramount importance.

One of the other, uh, professional partners that we work with, and, and I really should have pulled the trigger earlier, honestly, looking back, probably one of my biggest piece of advice is hire a bookkeeper as soon as humanly possible. That person, even if they're charging you a hundred bucks an hour for a good book, Will save you so much time and energy, it'll one, help you not make mistakes and probably get assessed penalties and pay taxes.

So they want your savings right out the window. More importantly is if you look at your time on a per hour basis, your time as an investor is actually far more valuable than a hundred bucks an hour. So hire a bookkeeper as soon as humanly possible. Um, definitely wanna get an insurance broker. Obviously you've got to have every single property insured, whether it's a rental property or whether it's a fix and flip.

And so you want to have a broker ready to help you out. Um, second, you need to have that property covered from the day you buy it all the way from when you sell it, and you can churn through and either have multiple policies on multiple properties. Or we actually have this cool, um, policy, it's called a revolving policy.

So we pay every quarter and then I just send in report to our insurance broker that says either I was flipping two houses or 20 houses and they adjust my premiums each quarter accordingly. So insurance broker is super, super important. Um, attorney definitely very, very important. Um, nobody loves to use attorneys when it comes to real estate cuz that means there's probably something going.

Or, or maybe a challenge or an issue, but it is invaluable and attorneys are typically worth what you pay. If it is, you know, your brother's cousin who just graduated from law school and is, um, you know, a family law attorney, but you want them to help you out with your real estate deal, you'll probably get what you pay for versus a savvy, seasoned real estate professional that you might, you know, be paying more money on a per hour basis.

Again, worth their weight and gold. So have a real estate attorney dialed up in real estate, not just general law. Um, then you also want to have, again, two lenders, um, actually almost three if I, if I think through this properly. Two hard money lenders or private lenders to help you fund your flip. And then I also really like to have a lender from a mortgage perspective because when the market shifted, for example, in Covid for 2020, and then for us in the second half of 2022 when the market shifted rapidly, Instead of theoretically losing money on a flip, you might actually want to refinance that property and keep it as a rental, whether it's for one or two years and get that turned around.

Or maybe you want to add to your portfolio and keep it forever. So kind of having three lenders now that I think about it, is probably a great way to go. Um, kind of that next tier, next level, when you go through the business growth standpoint, are those other professional partners, so, Business consultants.

We've got an amazing consultant that you'll actually meet in one of our further episodes down the road here at the end of this first season. And that person can help you with strategy, they can help you, um, really create your business. Talk about staffing, um, definitely want to talk about maybe a C F O.

That's a person who can help you from a high level, really refine what types of investing you want to do. Bringing in sister companies. Talking about, you know, rental property investment. So C f O can be really big, um, working with marketing staff and experts and professionals, whether it's hiring cold calling companies, whether it's hiring digital marketers, whether it's hiring people to produce this podcast, for example.

You wanna really work with professionals that know what they're doing. So it's all an evolutionary process of where you're at personally, where you're at from a funding perspective and, and really where you want your business to go. So again, that's kind of getting your financial house in order from your professional team Stand.

Then it's also, you know, sometimes this is kind of the, the non-sexy part of real estate investing. But again, from a protection standpoint, this is really, really important and that's business formation. So in Colorado, starting companies, and we typically use a limited liability company. Let's also maybe put a pin in this.

I'm obviously not an attorney, I'm not a cpa, and um, I'm not a financial professional, or at least now I'm not. Um, so take this advice with a grain of salt and check with your own professional. But in general, you want to create some sort of entity to own your business and ideally to own those assets within your business.

So we personally primarily focus on LLCs or limited liability corporations. You need a tax id? Um, every state's different. I know I've got family in New York, for example, and it's definitely expensive. You know, I think it's over a thousand bucks or 1500 bucks to start a company. Still worth it. In Colorado, it's, you jump on the Secretary of State website.

It's 50 bucks and you're done. It's super, super simple. It's super fast. Highly, highly recommend it. Um, you definitely wanna also, again, get insurance. We talked about it. You want vacant property insurance, which means if somebody slips and falls on your property while you're working on it, you've got coverage and, um, general liability, which is if there's disputes or problems or other things going on besides people slipping and falling, you want that protection as well.

Um, then you definitely wanna set up your own bank accounts. Here's a big thing that I see tons of investors do, and it becomes a huge problem when you get down the road. Not only personally, but especially when you get into partnerships, they co-mingle, or what you know essentially means personal money going into your account, business, money going into your account.

It becomes an accounting nightmare and a disaster. And so you want a separate business checking account, a separate business savings account, which is great to set money aside after each flip, or ideally for taxes coming up towards the end of the. And you also want to, in my opinion, have, um, business credit cards.

And so again, I would really try to avoid having 5, 6, 7, 8 credit cards. I know some of these get rich quick, you know, seminars from 10 years ago. Talk about opening up credit cards, maxing those out, funding your deals and your rehab. Especially in Colorado, rehabbing is too expensive, in my opinion, to do that, and so you want to have, you know, maybe one or two main credit cards that you're using for your business.

Again, don't have your personal charges. That is all the places that you eat lunch at and where your grocery shop mixed in with your Home Depot charges or your Florida Court charges. So you really want those. And in my opinion, it's great to do that because you can earn points and you can essentially go on vacation for free.

So to me, that's a huge benefit of having separate business accounts. And there's a couple different ways that you can do that. So when you do your business accounts, a couple different ways to look at it. I think the easiest way is to take your existing credit card company that you work with. Let's say you've had a Bank of America card for 10 years.

You can call them up and you can get a secondary card. That is run off of your existing credit. So they're not repoing credit and it's typically your overall credit amount that they'll give you. And you just have a separate card and you use that to do your business charges over time. You can then start to graduate to kind of the big leagues and have a completely separate business card or multiple business cards for multiple businesses.

And you get a ton more from a points and reward standpoint. So, um, I typically find that the big banks are actually easier to work. As much as it's great to have relationships with local banks or credit unions, there's just not as many online bells and whistles, which are important in my opinion. There's not as many, um, access to other products or investment products.

So the big banks are actually really, really, um, great to have. And, and, you know, depending upon when you're hearing this episode drop that we're obviously going through a banking crisis as well, so having your assets in a safe, secure bank is, is tremendously important. And having ones that are F D I C insured, Are also super, super important.

So again, kind of setting up your financial house in the proper order and getting you teed up for success is of paramount importance. Um, we'll also want to talk about, uh, you know, kind of that next level of credit card is you can do a cash back card. We have, um, a card that we use on Amazon, and that's because we do all of our fixtures and finishes or the things, the nice things that we put in the.

The light fixtures, the faucets, you know, the door knobs, things like that. Um, we order all those on Amazon and you get 5% cash back. So that math adds up really, really quickly and actually saves you a significant amount of money. So again, kind of gives you an ability to kind of stack and tier and structure your financial house from bank accounts, business accounts, and credit card.

Again, I know for some people this is kind of getting a little bit into the weeds, but I think it's super, super important. Um, and the last thing that we look at is, is once you've got your assets dialed, your reliability is dialed, your funding dialed and your your way to fund these deals or your credit dialed.

It's really just having that investment reality check. And so, um, really a, actually a great book that I would recommend is a book called Traction and the author, his name is Gino Wickman, and there's a two page document in that called the Vision Traction Organizer. And it's just a great way to give you just a two page business summary of how you're going to operate your business.

Ironically, when I went to graduate school, a long, long time, You know, you're writing 30 and 40 page business plans, which, hey, there's a place for those. I actually use this two page version far more often, and I can rinse and repeat and launch businesses much quicker, or stress test that, hey, this is probably not the right business to be in.

So just from a high level perspective, have that outlined so that you've got where you wanna spend your time and how you wanna grow your business properly documented. Um, look at the current market conditions. So again, in 2023 when we're recording this, right. We're in a pretty high interest rate environment.

The days of borrowing it at two and 3% are long on, and I don't think we'll ever see them again. But that also offers other opportunities, um, along with those challenges. So really kind of dive into what's going on in today's market. The other thing you wanna look at is what do we anticipate in the next one to two years?

Obviously, I don't have a crystal ball. Nobody has your crystal ball, um, but you want to put your best foot forward to make sure that you are properly, how's the best way to say it? Really being smart with assessing your risk and where you think the market is going. So for example, you don't start to invest in Airbnbs when you should have done your research and known that maybe for your city or municipality they don't allow Airbnbs.

So again, just kind of do your homework for where you think the market's going. Um, also your comfort level for how much rehab do you want to do? How big of a project do you want to take on? Do you want to start off and do condos? Do you want to come right out the gate and do $2 million properties? Do you wanna renovate a fourplex?

Really? What's your comfort level for how big of a project do you want to get into? Also more about deal success factors that we're gonna talk about action in this next upcoming episode, which is defining how do I determine, is this a good deal or not? So you want to have those metrics dialed in. So tune into the next episode.

We're gonna get pretty deep into that and, and to me, the way that I look at it is from a longevity standpoint. Not to say you shouldn't look 10 years in the future, but we like to look at it in a couple different manners. One, we look at it on a year by year basis. Then we also start to look at three years, and then we look at five years.

So by looking at that one year, three year, and five year, that gives you enough runway, if you will, to have a good thought out plan and process. Maybe not looking 10 years in the past, or excuse me, maybe not looking 10 years in the future, I should say. And then not being so worried about, oh my gosh, what's going on on a week by week basis?

So again, I know this might seem by like a lot of planning. But it's about mitigating your risk and it's about setting your financial house in order. So if we do kind of a quick recap as we wind down on this episode, it's getting your financial house in order is a huge key to success and really, in my opinion, it's getting your financing dialed in because as you move either up or down that, um, sliding scale of borrowing from cash to hard money, that could be a difference of $10,000 per project.

And if you're flipping 10 houses, a. Obviously simple math, that's a hundred thousand bucks. You know, that's a significant amount of money. So you wanna move up and down that food chain as fast as you can to get you to maximum profitability. So, um, again, the way that we look at it is we really want to engage with our audience and engage with our community.

So you can follow us on YouTube, on Instagram and Facebook. So elevation vest.com. At Elevation Invest or Elevation Investment Properties. And please do reach out to us. We definitely want to build this community and engage. Um, again, thank you so much for tuning in. I'm your host, Eric Marlin, and we'll catch you on the flip side.