Call me crazy, but I can count the number of sleepless nights I’ve had as a property investor on one hand … the answer is three.
What’s interesting about this admission is that none of these were caused by falling property prices, market crashes or scaremongering headlines. In fact, every single one came back to the same issue: cash flow.
Importance of cash flow for property investors
Over the years, I’ve learned that most investors spend too much time thinking about growth, equity and tax benefits, and not enough thinking about what determines whether they sleep well at night: the cash coming in versus the cash going out.
The first sleepless night I experience was what I’d call my Icarus moment.
Why? Well, my portfolio was growing, my income was strong, and somewhere along the way I let my lifestyle spending creep up on me.
Then the worst-case scenario came along. Interest rates increased at the same time one of my tenants stopped paying rent. Suddenly, the cash flow surplus I’d taken for granted disappeared and what felt comfortable became stressful almost overnight.
Property investment tip #1
The lesson I learned was simple: always keep a buffer. For me, that means at least three months of expenses sitting in cash. If I can’t maintain that buffer, the answer isn’t to take on more risk; it’s to spend less!
My second sleepless night came during the construction phase of a property project.
Anyone who has built property knows this can be one of the trickiest periods to manage. The expenses keep rolling in, but there’s no rental income to offset them.
At the time, I had the option to take out additional borrowings against available equity to cover holding costs, but I chose not to because I didn’t want to take on what I viewed as unnecessary debt.
Wait for it … then my income dropped.
I was earning a large portion of my income through commissions, and a few slow months put me under significant pressure.
Property investment tip #2
That experience taught me a lesson I’ve never forgotten; just because you borrow money doesn’t mean you have to use it. When it comes to liquidity and cash, I’d much rather be looking at it than looking for it.
The third sleepless night was as a result of a very different scenario.
I was deciding between two investment opportunities inside my self-managed super fund. One property offered greater long-term upside but would cost significantly more to hold. The other was cheaper to hold but may offer less growth.
Property investment tip #3
Instead of relying on gut feel, I sat down and built detailed cash flow projections for both properties. I stress-tested every assumption I could think of; higher interest rates, lower rents, vacancies and unexpected costs.
After running multiple scenarios I made my decision. That’s the kind of sleepless night I’ll take every day of the week.
Unlike the first two, it wasn’t caused by poor cash flow planning. It was caused by proactive cash flow planning.
Looking back, all three of these sleepless nights taught me the same lesson. The first two came from underestimating the importance of cash flow. The third came from respecting it.
I think this is one of the biggest mistakes people make, not just in property investing, but in business and personal finance generally.
We focus on profit, growth and capital appreciation because they make the headlines. Meanwhile, we ignore the thing that keeps everything alive.
Cash flow is oxygen
Cash flow is oxygen. Without it, even great investments become stressful. With it, temporary setbacks become manageable.
So, I’ll leave you with two questions:
- Are you having sleepless nights because of your finances?
OR
- Should you be spending a little more time thinking about your cash flow before the numbers force you to?
If you want help running the numbers or reviewing your structure so you’re not left awake at night you may like to book in a free 15-minute strategy call with my team to see if we can help.
