Momentum is powerful enough to propel you to the heights of success or push you off the cliffs of bankruptcy. As many of you know, we have been purchasing real estate these last few months because I have started to see deals that weren’t available for years. The market is truly starting to shift to give buyers some negotiating power.
Despite purchasing two duplexes in the last quarter and being in the middle of a major rehab, I am still scouting realtor.com everyday in search of a new deal. My momentum from buying the two properties is pushing me to acquire more. However, the recent high estimates for the renovation work was the a much needed wake up call to look at my cash reserves.
A cash reserve or emergency fund is simply money that you have set aside to handle payments. Many investors will tell you the reason they failed is because they did not have enough money to pay unexpected and always untimely bills. The worst part is that these events usually spiral into catastrophe.
Say you have an unexpected flood which you can’t pay to fix, causing your tenant to leave. This leads to you not paying the mortgage and forcing you to sell the property at a loss. The result is that you will owe 10 times the amount that you would have needed to fix the plumbing.
Most people recommend that you keep about 3-6 months of expenses for each property in reserve. As the number of properties grow, you can probably reduce that amount. Another tip is to have an open home equity line of credit (HELOC) from your bank available so that if the need arises you could get a loan. Of course, getting a HELOC is only smart if you have the means to pay back the high interests that these loans require. Ultimately, you must make a judgement call on how much you need. There is no right answer, but the question remains: Do you have enough cash so you don’t fail?
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