What Hurricane Irma Has Taught Me About the Importance of Cash Reserves

What Hurricane Irma Has Taught Me About the Importance of Cash Reserves

2 min read
Kenyon Meadows

Kenyon Meadows M.D. is a practicing oncologist and real estate investor. He vlogs his insights on income investing and financial literacy at The InvestDoc YouTube channel. He has been investing in real estate since 2013, and one of his goals is to prove that even busy professionals can enjoy the benefits of real estate investing—without it becoming a second job.

Kenyon is primarily focused on turnkey rentals and has published an e-book on the topic.

Besides owning an 11-property rental portfolio, he has participated in more than 30 traditional house flips and more than 50 crowdfunding deals. His other book, Alternative Financial Medicine, details the various asset classes in which he has experience.

Kenyon’s insights have been featured on TheStreet.com. He’s also been a guest on the BiggerPockets Podcast (episodes 219 and 300), as well as Doctor Money Matters, Docs Outside the Box, Cash Flow Diaries, and the Secrets to Real Estate Investing Show.

In addition, Kenyon has written blogs for BiggerPockets and the White Coat Investor, the largest physician-focused finance blog on the web.

Kenyon received both a bachelor in Chemistry and Doctor of Medicine degree from Case Western Reserve University in Cleveland, Ohio.

The InvestDoc YouTube channel

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I live in Southeastern Georgia on the coast, which was undoubtedly impacted by Hurricane Irma. This included mandatory evacuation, temporary work closure, and scrambling for portable food and available hotel rooms. During the week-long ordeal, the constant of barrage of images of torrential rain, flooding and downed trees created a sense of gloom of what I would find upon finally returning home. Likewise, I had similar concerns for the tenants and properties of my rental portfolio in Jacksonville, Florida—further south and therefore more exposed to the effects of the hurricane.

I feel very fortunate to report that, relatively speaking, we came out of this ordeal with manageable damage both to my own home and my rentals. I define “manageable” as no significant flooding, no direct hits from trees, and no need to file insurance claims. Nonetheless, the following communication from my turnkey provider/property manager attests to the fact that I will be facing some unusual financial challenges over the next couple of months, which prompted me to write this blog.

Related: The 6 Best Things You Can Do to Prep Your Home for Hurricane Season

Letter from My Turnkey Provider

Hurricane Irma’s Impact on My Tenants’ (and My) Finances

When we screen our tenants, we are very strict on verifying that their monthly income is three times the rent. With an average rental rate of approximately $1,000, this translates to a minimum requirement of $36,000 gross annually. In most cases, our tenants’ household income is in line with the national median household rate of approximately $57,000. Their jobs include bus driver, dietician, and retirees working part-time. These are good, salt-of-the-earth people, but they’re also not necessarily able to withstand a significant short-term cash flow crunch.  

When you factor in that many of the tenants have missed five days of work or more and have extra hotel and food expenses, you can see how they might quickly exhaust their savings. 

So, not only am I faced with the dilemma of half of the tenants or more having payment issues over the next two months, but I also have elevated expenses related to tree pick-up and minor structural damages. Combine this with my debt service, and this is likely to be the first time in over three years of ownership that I will have to feed my portfolio as opposed to receiving its usual cash flow. Given the relatively measured pace of my property acquisition and prudent use of leverage, it is a position I never thought that I would be in.

This underscores the often-repeated mantra that I have read on this site and heard on the podcast: If you’re going to be in the landlord business and survive long-term, you need to have adequate cash reserves. Roofs wear out, HVACs die, pipes burst, and yes, hurricanes happen.

Related: How to Gauge Your Property’s Flood Risk by Using Free Flood Maps [Video!]

The exact amount of reserves is a matter of debate, as I have heard amounts advocated ranging from as little as $500 up to $10,000 per property. Personally, I allocate $1,000 per property, which has always been more than sufficient in the past, but will be tested during this whole ordeal. Obviously, I am hopeful that the disaster relief rent program will eventually help, but I certainly can’t count it happening in a timely manner, if at all.   

How much in reserves do you set aside? Has anyone had their rental portfolio affected by Irma or other natural disasters in a significant way?

Let’s talk below.