Real Estate Finance Management: Best Practices for Business Growth
The main thing you need to manage as a real estate business is finances, as this can be the end all, be all of your company. If you aren’t getting enough money in and too much money is going out, it’s unlikely that your businesses will survive in the long-term. This puts having a strategic financial plan extremely valuable to real estate businesses, especially those who are just starting out and don’t yet have the liquidity of an established company.
In this guide, we will advise you on the best real estate financing strategies available to businesses looking to streamline their incomes and outgoings. If this is you, make sure to continue reading to find out more.
Financial Management Best Practices for Growth
Cash Flow Management
You need to proactively monitor income and expenses, ensuring that you always have enough reserves for unexpected vacancies or repairs that might occur. You never know when something foreseen could happen, so keeping your backup finances in good stead is always recommended. Distinguishing between property appreciation and liquid cash flow is necessary for operations, with each of these being used for different parts of the real estate business.
Use a rolling cash flow forecast to predict future shortages and adjust strategies proactively. When you move away from yearly budgets, you gain a 12 to 18-month forward-looking view that allows you to identify cash shortfalls weeks or months in advance.
Technology & Automation
Technology has come on leaps and bounds within the past decade, with automation being one of the best things to come out of it for real estate businesses. AI-powered platforms like Xero are perfect for managing small portfolios from startups, as it eliminates the need for manually data entry with the technology being able to find the best solutions to your financing problems.
You can also use bots to handle enquiries, schedule viewings and screen applicants 24/7, which reduces any vacancies from humans with bots being able to work without stopping. This allows the workforce to focus on other important tasks.
Capital Allocation
Effective capital allocation in real estate management optimises returns by balancing opportunities that have the chance of higher yields with all the risks involved. This typically requires an extra 5% allocation to private alternatives for diversification. Key strategies include balancing the capital stack, utilising low-correlation assets and employing improved management techniques to navigate market cycles.
Implement technology platforms as well to improve operational efficiency, as this can help you to modernise your workflow and reduce any manual errors.
Optimise Debt
Debt is one of the main reasons why businesses collapse. Managing this effectively is great for accelerating growth, enhancing profitability and improving cash flow while reducing tax liabilities that can leave your business in debt. Early action is important for this, as engaging with lenders 12-18 months before debt maturity to secure better pricing and covenant terms means you will be spending less.
It’s also recommended to shop for competitive loan terms, including reviewing interest rates, fees and down payment requirements via commercial brokers.
Reduce Asset Costs
Maintenance costs can quickly add up and lead to you spending more money, so you should aim to reduce these costs to allow your businesses to grow optimally. It also helps to improve operational efficiency and enhance property appeal to support higher rental income. If your real estate business has an office, you will benefit financially from investing in LED lighting, smart building technology and IoT-enabled climate controls to lower utility expenses.
Virtual tours are also now a viable option for property leasings, which can help to minimise the costs associated with physical showings.
Financial Reviews
Performance audits should be done regularly to compare actual performance against budget, so you can determine whether or not anything needs to be changed. Monitoring your financial performance on a regular basis helps ensure projects stay on track, while giving you an assist with adjusting budgets to avoid cash flow issues.
Reviews identify potential risks such as rising operational costs, debt-to-equity issues and market changes before they escalate, so can make changes to your business to avoid this.
Credit Insurance
Every business should have trade credit insurance, as it keeps them protected from customer mispayments. When a customer doesn’t pay for their services or payments are delayed, it can stop your business from progressing as you aren’t receiving the finances you need. This can especially impact small businesses, who might not yet have a lot of clients so if one doesn’t pay it can ruin their cash flow.
Credit insurance provides cover against losses due to their debtors being unable or unwilling to pay their debts, so you can stay protected financially.
Strategic Partnerships
Choosing your partnerships carefully is very important in ensuring that you work with people that you trust. Collaborative alliances between firms, such as developers, investors or technology providers are designed to help you with managing shared resources while gaining more expertise and reducing risk.
Public-Private Partnerships (PPPs) are very helpful, as these can be collaborations between private developers and public sectors to deliver infrastructure or large-scale housing.
