No hard-and-fast rule will tell you how much debt is appropriate for a particular company, because levels of indebtedness can vary across industries. To get an idea of whether a company is overburdened by debt, divide its assets by its equity. The result is the company’s financial leverage.
Good accountants and bookkeepers want you to learn the lingo. They want to help you make the bling, baby! So, read and learn. Keep this glossary handy as you work with your professional money managers. Use it to begin your journey to financial literacy!
Dow Chemical Co. (DOW). As one of the largest owner of chemical plants, Dow would take a long time to depreciate its long term assets, right? Wrong. For fiscal year 2005, Dow incurred a depreciation cost of $ 2.08 Billion. Meanwhile, its total depreciable long term assets are at $ 17.1 Billion. This gives it a ‘mere’ 8.2 years to depreciate all its assets. Dow assumes that the plant lifetime is around 8.2 years. This implies that even if Dow plant is still running ten years from now, it has already been expensed for and Dow can regard the plant cost as ‘free’.
Getting financing to rehab houses is harder now than before the crash, but can still be done. The preferred method to buying houses for rehab is cash or using an equity line of credit. This way if you are dealing with a motivated house you can close right away without the hassle of jumping through a lenders hoops. If this isn’t an option, you can find a private lender to fund your real estate deals. By offering friends, family, and anyone you know 8-10% interest you should be able to raise the money. You can set it up to defer payments to them until the rehab is complete and you sell the property. You will give them a first mortgage and personal promissory note in exchange for the money. This means they get the house if something goes wrong and can come after you personally.
So you have decided to step in to the big leagues and start flipping houses? First be sure to carefully evaluate your personal commitment to the projects, time available to invest into them and willingness to liability exposure. Having bought and sold over 150 houses, I am here to tell you that rehabbing houses is one of the most difficult investing strategies, but can also be one of the most lucrative.
For example, the cash flow examples is simply a detailed “budget”. You take your monthly sales assumptions and add any other incoming “cash” (loan dollars for example) and subtract your expenses. Carry over any extra (or loss) to the next month until you have populated the statement for 12 months. Voila! Another section completed.
When I review a business plan for funding, I always look at the financial statements first. It’s very easy to see if the person has no clue as to what they are doing by looking at the statements. The corollary is not true. meaning just because the financial statements are complete and rational the person doesn’t necessarily know what he or she is doing. That’s why the plan is longer than just three pages.