Where do folks put their emergency cash reserves?
Investor · Mission Viejo, CA · Member since 2013 · 48 posts · 14 votes
Hi,
I have been reading the posts and have set aside money for an emergency funds for our rental properties. The funds are currently sitting in a bank savings account earning close to 0.01% interest. I am wondering if there are better places to earn a higher yield but still have the funds semi-liquid in case a repair comes up. Any suggestions?
Thanks,
Dean
@Dean Suzuki My thinking revolves around probability. How likely is it that I will need $1000? Answer, extremely. So I keep $2000 in my savings account at virtually no interest as my short term float. How likely is it that I will need $5000? Less likely, but it will happen. OK, so $5,000 in easily liquidated investments such as CDs, split into $1,000 increments of rotating maturities. These get a whopping amount of interest, also, but better than savings accounts. As my portfolio grows so will this amount. Then I keep at least $20,000 in investments that are not very liquid, but ones I can use as collateral if I need the money in a hurry. That currently involves an unleveraged property, so that part of my reserves is also earning real money. But this also depends on knowing ahead of time where the money can come from so you can get it quickly. The income from this property is also tagged to replenish the liquid reserve funds, as needed.
I have this issue as a reoccuring theme in mortgage lending with my REI clients since banks always want tons of reserves for each property/business/liability and no one wants to to have their money earn .25% annually in a CD while waiting for the next "deal."
One option I employ is a well funded Equity Indexed Universal Life Policy (EIUL) policy to hold the cash reserves. There are specific advantages to why and I'll list some below:
- Competitive return 0-13% - there is a floor of 0-2% typically so no loss except for cash value attrition due to cost of insurance and admin in the earlier years but if properly funded you can out earn these costs allowing your policy to be self sufficient (will grow on its own in definitely as long as ROI on the policy is in a positive arbitrage position). The crediting and how it works and what its based on is usually the S&P500
- Access and flexible terms for withdrawal - you can withdraw up to your cost basis and use it for whatever reason you please if the policy is only earning 5% but you can make a higher return elsewhere you can call the insurance company up and generally it takes about 2 weeks to get your check. After cost basis is taken up you can take a loan tax free against the remaining cash value generally up to 95% of the available limit depending on your specific plan. The policy loans unlike 401k or other qualified plans do not have specific terms to pay back so you pay back the accruing interest on your terms not the plan or the banks terms.
- Tax free use and growth of the cash value and death benefit as long as the policy is managed and in force for the duration of your life till death
- High contribution limits that can be customized to suit your cash reserve/accumulation strategy unlike IRA, 401k, SEP, etc which are max out early and are highly illiquid
Main advantage I saw personally was ability to be in positive leverage not only inside the policy (interest credit> admin/cost of life insurance/cost of interest on a loan) but to be able to borrow from the policy and reinvest it else where and have the money in multiple places at one time and still maintaining all the benefits of life insurance policy and the other invested assets.
This is the order for most common scenarios as lender that I've seen people keep funds around for reserves and emergency cash.
@Albert Bui had some great ideas. I either use a savings account or intentionally pencil in a $5,000 deduction in my check book so that money does not show up as being available. Unfortunately when I do it that way sometimes I fall victim to using it to buy a new house. When I do the savings account I often hit it when property tax comes due. Despite my best intentions that time of year usually finds me short on cash.
In a piggy bank in the freezer ,I like cold hard cash!
@Dean Suzuki My thinking revolves around probability. How likely is it that I will need $1000? Answer, extremely. So I keep $2000 in my savings account at virtually no interest as my short term float. How likely is it that I will need $5000? Less likely, but it will happen. OK, so $5,000 in easily liquidated investments such as CDs, split into $1,000 increments of rotating maturities. These get a whopping amount of interest, also, but better than savings accounts. As my portfolio grows so will this amount. Then I keep at least $20,000 in investments that are not very liquid, but ones I can use as collateral if I need the money in a hurry. That currently involves an unleveraged property, so that part of my reserves is also earning real money. But this also depends on knowing ahead of time where the money can come from so you can get it quickly. The income from this property is also tagged to replenish the liquid reserve funds, as needed.
If you have a lot of rentals, you will want to stuff away X amount of money ech month for property taxes and insurance. Depending on your state, you can put tenants' security deposits in that account. Use a separate account and don't worry about interest. If you have a house that's free and clear, get a HELOC and that can be your emergency reserves. Your cash can then be used for more investments. You have an emergency fund (equity) and you show plenty of money in the bank (security deposits and escrowed money for taxes and insurance). I've gotten dozens of mortgages and have never once had a banker question if the money I show on bank statements is actually tenants' security deposits.
Seems we are mixing reserves for repairs and cash reserves for lending which was not the question.
Maintenance and repair reserves, I just used a money market account.
More set aside in CDs as Walt mentioned with a maturity distribution is much better holding larger amounts for liquidity.
You can borrow for actual expenses, but not for loan reserves, so credit cards aren't a liquid funds source. Borrowing from life insurance is not a source of liquid funds for loans, but you can borrow for expenses. Some in secondary market lending do not use cash value from life insurance for two reasons, one, it may not be a timely distribution of funds, depends on the company, cashing in cash value can take more than 30 days and secondly, cashing out the asset reduces the death benefit which may be available to pay off the loan or help in making payments. Not something loan underwriters want to see being relied on.
Mutual funds are considered liquid funds.
Securities, stocks are liquid depending marketability, Exon stock is marketable, Louie's Motorcycle Shop might be public but it may not be that marketable. Same issue with bonds may exist.
Qualified tax programs are viewed as liquid funds, some have the same issues of liquidity as life insurance and the balance isn't used but the after tax amount available. Vested funds may have restrictions, so lenders may want to see terms.
I won't go into accounts receivables and notes, usually not considered in residential lending, notes are included in the assets, but assets are not really a big consideration as they use to be.
Mattress money is not counted, when I saw this thread and with Rob posting, I thought this might be about "emergency money" and how much Rob keeps in his "Go Box", LOL. :)
Good points, the reason they don't really ask is that they only use verified funds, they don't need to ask. :)
Maintenance and repair reserves, I just used a money market account.
More set aside in CDs as Walt mentioned with a maturity distribution is much better holding larger amounts for liquidity.
You can borrow for actual expenses, but not for loan reserves, so credit cards aren't a liquid funds source. Borrowing from life insurance is not a source of liquid funds for loans, but you can borrow for expenses. Some in secondary market lending do not use cash value from life insurance for two reasons, one, it may not be a timely distribution of funds, depends on the company, cashing in cash value can take more than 30 days and secondly, cashing out the asset reduces the death benefit which may be available to pay off the loan or help in making payments. Not something loan underwriters want to see being relied on.
Mutual funds are considered liquid funds.
Securities, stocks are liquid depending marketability, Exon stock is marketable, Louie's Motorcycle Shop might be public but it may not be that marketable. Same issue with bonds may exist.
Qualified tax programs are viewed as liquid funds, some have the same issues of liquidity as life insurance and the balance isn't used but the after tax amount available. Vested funds may have restrictions, so lenders may want to see terms.
I won't go into accounts receivables and notes, usually not considered in residential lending, notes are included in the assets, but assets are not really a big consideration as they use to be.
Mattress money is not counted, when I saw this thread and with Rob posting, I thought this might be about "emergency money" and how much Rob keeps in his "Go Box", LOL. :)
Hi Bill I am not sure how policies were structured in the past but the Cash Value Component and the "loan," component at least with respect to a Equity Indexed Universal LIfe are "separate." So this means that if you had 100k cash value in this policy and you were to borrow 50k, the insurance company lends its own 50k from its cash reserves which are separate from its general account that they invest your cash value at in. So your cash value does not go down but rather your 100k cash value now has a 50k lien against it. The cash value component is still crediting based off the 100k cash value while separately the 50k loan component is being charged within the the policy as well so this is where a positive spread in cost or credit could occur.
With respect to lending I can use the net surrender value of the policy to show "reserves," for residential or commercial lending. So when I need 6 months PITIA (Principal/Interest/tax/Insurance/Assessments) for each property I can use net surrender value. Yes, net surrender does go down if a loan is taken against the cash value so a balance between use of policy loans and reserves must be taken into account.
Checks from the company will vary from company to company but generally its around 2 weeks to obtain funds and I suppose it could take up to 30 days but in my experience when we used it for a down payment on a residential loan it took about 5-10 business days. To note though there are clauses that says the company could take up to 6 months on some policies to provide your funds so I would check your own specific company.
The type of EIUL policies that I've reviewed have cash value in the first year up to 85-90% of the first premiums paid. Whole life policy's in the past may have been different since mortality rate was a lot higher and whole life offers more stable, generally lower returns and guarantee's but the costs for those guarantees are higher cost. Its just a different flavor of ice cream really, depends on the preferences.
Instead of structuring policys to get maximium death benefit which emphasizes benefits at death, this strategy is to focus on the living benefits while you're alive (cash value accumulation). The goal is the least death benefit so that the costs of the policy are as low as possible and a focus on cash accumulation and growth to the max limits allowed by law. When this is combined with a lower mortality rate today as more people begin to live longer the actual cost of the insurance is becoming less and less expensive so more cash value is seen in the early years with the right amount of funding.
Spoken like a true insurance salesman! How many of your 75 posts have been a pitch on insurance?
You listed yourself as a banker, exactly what do you do in the bank, :m guessing you're in the customer services area, investment/insurance side?
We are never going to agree on much, I doubt it anyway. I have no interest in volleys to claims made, not going there, but thanks.
My experience has formed a rather astute understanding of insurance, insurance is to cover risk, life insurance has elements that have been developed primarily for marketing the product, it's a lousy investment and one thing I have found over the years is that agents are the marketing side, not the claims guys, not the actuarial side, not the legal department, much what comes from an agent isn't the whole picture, most don't even know the whole picture. Just saying, the agent's job is to generate business, they don't run the business. Good family friend started American Family Insurance Company, he agreed with me, it's a business, not a social program. :)
There's a lot of misunderstanding on how each policy works from whole life, limited pay life, variable life, variable universal life, term, to equity indexed universal life. They all have a lot of similarities in many ways but differences also.
I did not mean to put your view down but, you had mention that you cannot borrow the Cash value(CV) from a policy with out the CV going down similar to how borrowing on 401k retirement plan would work but that is not true policy loans act similar to a lien against real estate.
You also mentioned you cannot use life insurance as reserves and that is also untrue. My day to day profession is as a mortgage lender (not customer service/bank rep/ etc) and I see the issue with reserves all day long especially with jumbo, portfolio, and commercial lending. Banks on the contrary love cash value life there's always a spot for it on the personal financial statements and residential loan apps. They view it as a stable asset for: reserves, down payment, used as collateral for other loans, and etc.
Yeah the argument for what permanent life insurance is and isnt I think just depends on how its structured and how its utilized. Your view and your friends view is great. Then again like a knife it can be used to save your life or harm you as well =).
I agree with @Bill Gulley
Emergency money is not investment money. It's used for financial safety and security. Your return comes from the protection is offers, not an ROI. (That's the purpose of the asset it secures.) Not only wouldn't I attempt to maximize any return on emergency cash, I think any risk is inappropriate. Access and liquidity are the priority here and @Bryan H. provided a good prioritized list.
Specifically, I like a checking account at a national bank like Wells Fargo or BofA. With many branches, I could walk into any branch and speak with a real human or FedEx a check (even cash) or wire money in an emergency, if I were out of town. If you travel internationally, use CitiBank.
I thought this was a really good question, Dean.
Jeff
I keep cash reserves in my online savings accounts. They are linked to my regular checking accounts, so I can transfer without any hassle. The advantage for me -other than the higher interest rate compared to my bank- is that the funds are isolated, so I won't get excited and spend too much, lol.
My CapitalOne360 account lets me have any number of separately named savings accounts, so I have one that gets a monthly auto deposit for property taxes, another that gets an auto deposit for capex, etc. Any saving "project" (or property) can get its own account, which helps me get my brain around where I'm at much more easily.
The higher paying accounts pay around .75% to .90%... not a lot, but better than the brick and mortar banks for sure. Here's a link to some: http://www.nerdwallet.com/blog/banking/nerdwallets-top-high-yield-online-savings-accounts/
Emergency money is not investment money. It's used for financial safety and security. Your return comes from the protection is offers, not an ROI. (That's the purpose of the asset it secures.) Not only wouldn't I attempt to maximize any return on emergency cash, I think any risk is inappropriate. Access and liquidity are the priority here and @Bryan H. provided a good prioritized list.
Specifically, I like a checking account at a national bank like Wells Fargo or BofA. With many branches, I could walk into any branch and speak with a real human or FedEx a check (even cash) or wire money in an emergency, if I were out of town. If you travel internationally, use CitiBank.
I thought this was a really good question, Dean.
Jeff
I think we are pretty much in agreement, but I do think it depends on how you perceive the risks and the nature of an emergency. The strategy I mentioned covers short term needs. Anything that requires more money in a SFR portfolio, which was my context, would also not come due before the 3-4 days it would take me to get a loan. So considering an investment property as part of my bigger picture is not a risk, in my opinion. And yes, I have several of the other methods mentioned as a backup, but they are more my plan q type options, not my primary.
I do disagree about not considering the ROI on emergency funds. Security and liquidity should be the driving factors, but ignoring return is still foolish. A CD might not make a ton of money, but they beat savings accounts for return and have the same security. And different banks pay different rates. Plus, as your emergency fund needs grow, that becomes more of a factor.
I keep it in a separate saving account, in a separate bank.
Tracey
Some good ideas for emergency funds could be:
- savings
- HELOC's
- personal lines of credit,
- secured/unsecured line's of credit
Emergency reserves and accumulated funds that sits "idle," waiting till the next deal may have been confused.
Hi Folks,
Thanks for all the responses. I have learned a lot in them. It sounds like savings accounts and tiered CD strategy might be the way to go. I'll start to look into them. I'm wondering what people are computing for safety/emergency funds but I'll post another question on that. I have heard and read 3-6 months expenses per property. So, I have been computing on 5 months expenses per property which is adding up to quite a bit. When I look at that amount sitting in a savings account, I was hoping to get a higher return but still be liquid.
Thanks for all the responses,
Dean
I have a single duplex property at this point, so this scenario works for now. As the portfolio grows, I recognize I will need a better division between personal and business funds.
I keep funds in my personal high-interest checking account. 1.75% accrued monthly with minimum requirements like 12 debit card uses/month, sign into online banking once/month, one auto debit and credit. Nice safe return in a 100% liquid account. Centennial Bank is my local institute.
@Dean Suzuki Count me as another one with savings and a CD. To explain how we handle our funds, I have to explain how we set up our accounts. We own our house and 3 rentals, and we have 4 bank accounts set up this way:
1) Checking for weekly/monthly bills and living expenses. This account is the one we use to pay mortgages (for our home as well as rentals), utilities (home as well as rentals), groceries, gas money, etc. This is where we deposit paychecks and rent checks, minus the amounts for accounts 2, 3, and 4 described below.
2) Checking for bills that only come once or twice a year. This account is for property insurance, property taxes, car insurance, car registration, etc. We added up the total annual expenses, then divided by 12 and deposit that amount into that account each month, then I just write checks for the bills whenever they come.
3) Savings for rental expenses, and security deposits. We put our security deposits in this account, and then each month I deposit money into this account for maintenance/capex costs ($XX per unit we own).
4) Savings for "money in play." This is where our extra money goes that we are saving up to buy more rentals. We deposit a set amount into this account each month from my paycheck.
I set up a spreadsheet in Excel and input all our expenses (mortgages, average utility bills, car insurance, etc.) under various columns and determined what amounts to put into each account that way. I update the spreadsheet periodically as circumstances change.
Then for our emergency fund, we have a CD with about 4 or 5 months' worth of *all* our expenses as a household: living expenses, mortgages, utilities for all properties, monthly portions of annual expenses, etc. We don't touch this money, not even to buy a new property - we truly view it as "the world is ending" money. We would only use it for a major catastrophe (massive medical expense, loss of job for extended period, etc.), not for something that we should have planned for (new roof, car repair, etc.).
if you have a roth ita throw 5500 into it the first of the year. if you need the cash you can always withdrawl the contributions without penalty. you have a year and until april 15 to decide to leave the money in there.
There is a min 5 years before you can withdraw your cost basis in the policy and if you withdraw your gain prior to 59.5 yrs old you may have have both tax and penalty so I'd be careful with that strategy.
Good point therefore run out and open an account with vanguard/fidelity and deposit 1 penny so you can timestamp you account. So in 2019 you can employ this strategy.