Cash Reserves Are Critical In Real Estate Investing
We have been working with Memphis real estate investors for the past 7-10 years in one fashion or another and one thing that never changes about new investors is a lack of understanding when it comes to cash reserves. So many people think that real estate investing can be boiled down to a quick series of numbers, i.e. - how much will this be or how much will that be or how much should I set aside for this expense and that expense? All of those are VERY VALID QUESTIONS!!
But the one questions too few investors ask of themselves is how much do I want to keep in reserve to make me feel comfortable...regardless of how my property operates? There are so many variables that play into each persons finances that simply saying here is how much you should put in reserves is a great injustice to an investor. There is no formula! There is no calculation that says if you keep 'X' in cash reserves you will be ok. If it did exist, it would say if you are buying an investment property for $100,000, just for the sake of using a round number, and you keep $100,000 in cash reserves...well, you should be ok!
A Piece of Advice For Real Estate Investing Peace of Mind
Keep enough cash reserves on hand so that you feel safe and protected not just from an investment hiccup, but from a real lifestyle change. Take into consideration the liquidity of all of your investments. Take into consideration your income outlook. Your current job and income as well as your spouse or any other source of income. You should absolutely take into consideration how your property and any future properties are going to perform. If you are using Premier Property Management, then you have all of the metrics already. If you don't, we can provide them for you. All of these questions need to go through your mind before determining what level of cash reserves you need to keep on hand.
The point is, before twisting your brain around how much to keep for this and how much to keep for that and how much to put aside every month...take a look at your current situation and make a proactive plan from there. Again, for round numbers sake, if you have $100,000 in cash assets and you want to invest in a property, it might be a foolish plan to purchase a property all in for $95,000. Especially if the money has a psychological calming effect on you. It might be much better to either purchase a less expensive property and be honest with yourself about how much money are you going to want to see in an account each month in order to feel secure. That amount will vary for everyone and how well you deal with risk will determine a lot about your amount!
I speak from experience when I tell you that depleting all of your cash reserves to get your money working, is a backwards investing strategy that can backfire quickly. If your expenses outweigh your ability to earn an income and are only evened out with the cash flow of your properties, then you probably do not have enough cash reserves. If you have trouble sleeping at night or even with the thought of not having a large enough cushion, then you definitely do not have enough cash reserves. It is not just about the dollar amount, but about how you as an investor perceive your investment strategy and success.
Hope that helps a few investors out there plan for their next investment! ~