Budgeting Thoughts Before the Hunt

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If you are well versed in your financial situation, you probably know there are 101 different approaches to budgeting. Budgeting is simply ‘an estimate of income and expenditure for a set period of time.’ Feel free to research the best strategies, but today let’s not over complicate things. If you have an approach to project budgeting that works for you, stick to it. I will be sharing my own and perhaps pulling in techniques from a few pros as well.

Budgeting is a snapshot of project preparedness. When preparing budgets, you will run into a lot of questions. Your goal is to answer the questions in the form of costs. Here are a few examples:

• How much information have we gathered?
• How much money is needed to sustain the property?
• How many months will my property be vacant?
• etc…

With all the answers, you will know how much it takes to sustain an investment until we achieve success. The result? Long term cash flowing properties that improve your quality of life. Let’s answer some questions, shall we?

Income…

Why would we start with income, I haven’t even bought the property yet? What does ‘income’ refer to? Well, let’s just break it down between two categories. ‘Invested income’ and the income derived from the investment itself, or ‘earned income’.  Let’s start with invested income.

Just imagine… Today you start a new company: your future investment. A separate entity completely detached from yourself and your personal income.  The company’s inward cash flow to date would be ZERO, just as would be your expenditures.

In order to begin the second half of budgeting… a.k.a. Expenses, it is necessary to have a pool of cash to justify it. 

Look at this spreadsheet defining the startup costs of a project. Did you note that purchasing the property would be considered an expense? You’ve heard the phrase it takes money to make money. This is the perfect example.

What is the best source of income?

Compare your newly formed company to any startup company. Where would a new company start? Remove the images of Mark Zuckerberg and Peter Thiel from your head. Chances are this investment isn’t going to require the influence of angel investors.

I like to think of it as circles of influence.  

The source of income that you, as manager of your project, have the most influence over is your own personal income. The larger the circle becomes the more money there is available, but the difficulty in obtaining it increases just the same.

Simple! 

I don’t have money!

There are solutions for that, but that’s an argument for a different day. From this point on I will assume you do.

The question is simple

How much do you want or can you invest today? (Set it aside)

When working on personal investment, one of the biggest hangups a new investor can have is not knowing the difference between personal savings and those dedicated toward an investment. It is important to establish a system to keep these numbers from blending together. Transfer it into a different account where it can be readily available and easily monitored.

Congratulations. Your newly formed company just received an income! Your first success. Your goal now is to identify the investments needs and quantify those needs into a list of expenses that will ultimately create solutions to maximize future ‘earned income.’

Technically, you should have used this number as a basis for the house hunting we’ve already done. If not, decide it now.

It’s time to jump into the company’s expenses.

Expenses

Below you can see an example of the budget template we’ll be working with throughout the series:

It can be a daunting task to try to think of every future expense. It’s hard enough to track our past expenses. Our goal today is not to think of everything in detail, but instead estimate some expenses that will ultimately remove some properties from your current list.

If you have the experience that is great, use it! I will also share some expenses that are particular to the auctions to give you a hand while preparing your company project budget.

We can start by categorizing our expenses as Capital and Operational.

All the expenses required to purchase and prepare the project will be categorized as Capital costs. Most of these expenses will be one-time lump sum payments. These are the majority of expenses that will be covered by the income you invested in the company and can typically be considered an asset for tax depreciation purposes.

Operational costs will be used to sustain the property for the long-term. A good budget will reserve a portion of the initial investment to cover the operational costs for a set period. How long it should be sustained is usually dependent upon the project. These costs will be for services and can be paid monthly, quarterly, and annually.

Depending on if you plan to sell or rent the property after initial project completion, operational costs will have different scopes. Typically, operational budgets are based on a 1-year period. Selling the property, ideally, is done in a much shorter period of time.

Don’t stress over this process too much. It was more informational since I assume you know a bit about budgets already. We will look at budgets more in a future post.