"Keep Your Powder Dry" versus "Keep Your Money Working"

[Bryan Hancock]

I see comments about maintaining liquidity on the forums all of the time. This is obviously person-specific and represents a risk/reward tradeoff, but I was wondering what people's comments about debt are. I have heard 10% of long-term debt is a good target to maintain borrowing capacity. I have also heard banks want 6 month's worth of PITI payments for each project.

These seem like good minimal requirements, but they aren't very useful targets for building a long-term portfolio prudently. How much cash do you recommend keeping in your portfolio? What factor(s) would influence your decision to keep more or less cash? Is measuring your cash against long-term debt a useful tactic as your portfolio scales in size? If not, what alternative measures or ratios would be good to look at?

[Don Konipol]

Not only does the answer differ for different people, as their goals, objectives and risk tolerances differ, but it also differs as life progresses.

When I was first starting out I tried for 100% leverage and was unconcerned with keeping a cash balance for contingencies. This worked great for 2 years and not so good when the Texas economy crashed in 2003!

Now, at 58 I am zero leveraged, and still keep a large contingency cash fund. However, with interest rates so low, I am considering new leveraged purchases. I will continue to keep a large contingency fund. No only do I want to know that I can support my properties without rental income (if neccessary), I also want the ability to have my sale decisions reflect favorable market conditions and not a financial "motivation" on my part.

The reason I like cash is that I make money buying from financially motivated sellers, not becoming a financially motivated seller.

The more cash you have in reserve, the more leverage you can safely use. Paying 5 % interest can be a reasonable risk, paying hard money rates entail a much greater risk and a need for a much better purchase.