Category Archives: real estate

Cash reserves – important piece of any investment plan

Just today I received notice my company would deposit $75 into my bank account within five working days. This was compensation for five t-shirts I bought for the Nashville Java Users Group when we attended the DevNexus conference back in March. I basically asked Jeremy if I could hand him $75 in cash when I arrived, and of course he said yes! This required that I float the cost of this until I get compensated.

Back in 1999-2000, at my old company, the travel department got downsized by a huge amount. It meant there were backlogs of expense reports not getting filled. When your corporate credit card doesn’t get paid, they suspend it! (BTW, this impacts YOUR credit rating, not the company’s). Of course, I only discovered this when it came time to book a trip. I had to pay for the trip myself, because my card was delinquent. From that time forward, I paid cash up front for my trips, and had to wait sometimes 60-90 days to get compensated. Even when new memos came out, telling people to not do this so that our trips woud be properly covered by the insurance policies supplied by our creditor, I wouldn’t consent, because I had already been burned once and wouldn’t suffer that again.

The key requirement in both these circumstances is you must have enough cash on hand to front these expenses. Maybe $75 isn’t much, but are there times where you felt you didn’t have that much wiggle room in your paycheck-to-paycheck budget? I certainly have. It’s the key reason that the last time I cashed in a major chunk of stock option from my current job, I didn’t immediately apply to the debt on our town home. Instead, I decided to pool some liquid capital and wait for the next allotment of stock option to pursue that debt.

This extends to the realm of whatever business you plan to run. One vital component to success is having enough cash reserves to handle shocks of this kind. Business expenses, especially investment real estate, are very bursty and never smooth and average. If you investigate the reason people were getting foreclosed on properties over the past decade, you will find that many suffered from lack of cash reserves that were critical when Murphy dropped in with bad circumstances like being out of work for 6 months. People that get behind, rarely catch up. I’ve heard the same for renters as well.

As Jeff Brown often says, Murphy is still alive and knows where we all live. It is better to assume that he will show up periodically rather than hope that he won’t. If you plan to get into investment property, you need to right amount of cash reserves so a panic doesn’t ensure when things bad happen. You should have a minimum of 6 months of total cost of expenses and mortgage expenses, and count 50% vacancy in there as well. 12 months is even better. If you start with 6 months of cash, consider routing any extra rent into that reserve until you are up to 12 months, before actually working on reducing the debt. With that much in easy-to-reach cash reserves, you can weather many storms and actual pursue a solid investment plan.

I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.