Almost every deal I do is no-money down. If I end up putting any money down on a deal that means it must have a ton of equity and I needed to give the sellers some cash to close the deal.
However, even though I rarely put cash down, I still always keep very hefty cash reserves for emergencies. You see, when most people start out in this business they’re broke. And they think they can do a lot of no-money down deals without needing any cash at all.
Yes, this is true, but you still need cash reserves. For what? For the rental property you picked up that just went vacant. Or for the rehab that went slightly over budget or any number of other things.
The good new is…
The money doesn’t have to be yours. It can be a HELOC that you have, which you never touch. When I first started out I had a $100,000 HELOC on one of my properties, in case I ever got in trouble with my properties. (I own a lot of rentals and if by some terrible fate they had all gone vacant at once, I would have needed to tap into that money.)
Thankfully, I never had to touch my emergency cash reserves but I know I slept a lot better at night knowing they were there. Besides a HELOC, you could borrow money from friends and relatives. Relatives are one of the best places to get emergency money or private money.
Also, you could go to the bank and get a signature loan.
I think you have to have pretty good credit, but I’m sure I could go to the bank tomorrow and get a $25,000 signature loan without a problem. Last resort would of course be credit cards. I’ve never done this and wouldn’t recommend it, but if push ever came to shove, you might have to resort to drastic measures.
The point I’m trying to make, is that you don’t want to do a lot of no-money down deals early on, just to see all of your hard work implode because you don’t have cash reserves. In fact, all throughout your real estate career (and life) you should have plenty of cash reserves that way when an emergency does strike you don’t have to worry about losing your properties, or your business.
Because, believe me, emergencies will strike if you stay in this business long enough such as a tenant tearing up a house, or a rehab gone bad or a broken pipe that floods your house.
Related posts:
- Return on Investment (ROI) Versus Cash on Cash Return (CCR)
- When Is Cash Flow NOT the Be All End All?
- Are You Getting Great Cash Flow from your Rental Properties?
- Living Vicariously Through Others’ Positive Cash-flow
- Why “Little Cash and No Credit” Should Be A Motivator
Article Author: Jason HansonJason has written 194 articles for us.
Visit Jason's Website: http://www.PrimoCoach.com
Jason R. Hanson is the founder of National Real Estate Investor Month and the author of “How to Build a Real Estate Empire”. Jason specializes in purchasing properties “subject-to” and has purchased millions of dollars worth of property using none of his own cash or credit.
Joshua Dorkin
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I agree cash is king. But a HELOC is not the same as cash. In 2007 I had $200k in HELOC and a bank LOC of $50k. Today all I have is a $2k bank LOC. The HELOC’s were all closed though I never got to use them – the banks just arbitrarily decided to revalue all my properties and give me “zero” equity.
I think having a HELOC is great for reserves because cash is accessible yet you don’t have to have cash sit in a low/non-interest bearing account. However, because a HELOC simply relies on the equity in a property, you must be prepared if property values decline and you lose the HELOC. If that happens you must be ready to reevaluate your investment or look for cash reserves elsewhere. I think that’s a lot better than doing a cash out refinance and holding cash reserves in an account that pays less interest than what you’re paying. Planning is key.
It is very important to keep some cash for emergencies arise suddenly in any situation.