Are you familiar with the financial management practice of maintaining at least one month’s salary in a savings account? Financial management experts recommend doing so in order to guarantee you always have a cash buffer on hand. It turns out the same principle applies in property investing.
Property investors run the gamut from real estate developers to property flippers to landlords with huge rental portfolios. Yet despite so many different investment strategies, all property investors have one thing in common: the need to keep cash in reserve. Maintaining a cash buffer is always a good move.
Cache Is a Liquid Asset
Before getting into the reasons for maintaining a cash buffer, consider what cash is to a property investor. Cash is a liquid asset, as opposed to the investor’s hard assets (the properties in his portfolio). Think about what that implies.
An investor could be wealthy on paper but still cash poor. He might have a portfolio of rental properties worth hundreds of millions of dollars but have virtually no money in the bank. If he needs cash to cover an emergency and he doesn’t have it in the bank, then what? He needs to consider selling properties.
Reasons for Keeping a Cash Buffer
Explaining why it is always good for property investors to have a cash buffer could be as simple as saying that emergencies occur. But such a simple explanation doesn’t do justice to the risks of property investing. Therefore, let us dig into some of the more particular reasons for keeping cash on hand:
1. Cost Overruns Are Real
Property investors do their best to estimate every cost associated with a new property. Sometimes those estimates are off by a little. Other times they are off by a lot. In the case of the latter, underestimating could lead to significant cost overruns. How will those overruns be paid for if the investor does not have enough cash on hand?
Credit cards are always a possibility. So is a revolving line of credit. But such credit instruments are costly and often come with undesirable terms. It is better to avoid cost overruns as much as possible.
2. New Opportunities Come Up
Some investors keep a cash buffer just because they know that new opportunities are going to come up from time to time. Imagine an investor who just ran across an opportunity to obtain a new rental property. He goes to ActiumPartners.com in Salt Lake City, UT for a hard money loan. Unfortunately, he doesn’t get approved because he doesn’t have a large enough down payment.
Not maintaining a decent cash buffer could prevent an investor from seizing a golden opportunity. Let too many of those opportunities go and it begins to affect long term ROI. No investor wants that.
3. Some Expenses You Just Can’t Plan For
Rounding things out is the reality that some expenses just cannot be planned for. A new property might look like it is in tip-top shaped. It is not until after the title transfer that the investor discovers hidden repair and maintenance issues. He is going to have to spend extra money on work that may have dissuaded him from buying the house to begin with.
Cash is a liquid asset that is always available. No matter what form a financial need might take, cash is the universal way to meet it. If I were a property investor, I would be sure to maintain a sizable cash buffer. I see no point in taking my chances with liquidity. If maintaining a buffer would make me a cash hoarder, that’s just fine.
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