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The average person is probably familiar with very basic accounting principles. The art of balancing a checkbook and paying bills on time is something that takes certain knowledge to do correctly. Many people fail to learn the basics and the same can be said about beginning real estate investors. One important thing to understand about real estate and investment property is that it is a business. Some people get into it as a hobby and find success. The majority of people make decisions that affect them for years to come. Knowing the working capital definition can help you to plan properly and to make good decisions with your income and future investments.
The definition of working capital is the difference between your assets and liabilities. The assets that you own in your business are considered an investment. It took a certain amount of money to buy these assets and you likely gain some liabilities by purchasing them. The same concept is true in real estate. Your investment property is your asset. You gain an instant liability because you pay cash or finance the property purchase. The rental income that is generated from a property is a passive income source that with good planning can help you exceed your liabilities each month.
How Working Capital Should Be Treated
It is the day-to-day business that can add up to a lot at the end of a month. Depending on a lease agreement that you have with a tenant, you could be responsible for paying utilities, repairs and inspection costs. There are many expenses that are common with an investment property. Having enough cash on hand when you become a property owner can determine your future property success. Property management fees are an expense that may or may not be charged to your monthly rent. Some companies bill monthly or quarterly. Knowing how to manage the expenses with your property can help you achieve a profit. Every good investor takes part in some of the financial aspects of a property or in their investment business. You don't have to know every detail, but a basic understanding can go a long way for you as a professional.
There is a lot that you can do as a real estate investor to take control of your income. It is understandable that not everyone is a financial expert and might not feel comfortable counting every dollar and every penny. Hiring a good bookkeeper or accountant that is knowledgeable about investment property income and expenses can help a lot. Knowing how to max out your rental income and decrease your expenses is the hidden secret to owning a property. The annual appreciation, passive income and other perks that come with owning property are all built in time. Controlling your working capital when investing in things like turnkey investment property will literally build your wealth.