Austin, TX · Member since 2018 · 16 posts · 3 votes
Hi all!
I've come into some recent cash while also being in the midst of my first flip, funded by a private loan and a Line of Credit.
J Scott's recent interview on the BP podcast discussed the inevitable economic depression that is coming and the wisdom of preparing by both keeping borrowing low, but also, holding onto your cash for reserves. The two seem to be at odds. I'm debating whether to pay down some flip expenses, thereby reducing holding costs (we're now 2.5 months past the initial deadline).
I welcome any input. What are others doing in keeping this balance of borrowing/maintaining reserves?
Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes
7y
Hey @Susan Armstrong Fisher the position you are in is better than a stick in the eye huh? :) joking aside, you do NOT want to over leverage yourself, that is the biggest mistake new investors make, right now there is a cloud in the sky so you should have your umbrella handy on you right? that is your cash reserves.. here is what I want you to do.
take ALL of your expenses (related to your business) and multiply that number by 12 for instance
if your total business expenses are avg 5k/month x 12 = 60k <- that is how much money you should have in reserves
those reserves are used for instances like when the market turns or rents drop and vacancy increases or a tenants ex boyfriend drive his car into your house!.... etc. hedge your risks and be prepared is the best way to invest.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
7y
@Susan Armstrong Fisher if you are flipping it's not so important to keep as much reserves as if you weren't flipping. Meaning, you should be paying back everything once you flip. If you were buying and holding then you would actually need a very specific amount of reserves for your permanent financing. Now, that is speaking from the lending perspective. If you want to pay down debt now....you'll just get all the cash back when you sell the property. Might be worth it
Just about every financial planner/adviser/etc will tell you that you need 3-6 months of all of your expenses in liquid cash that you don't touch. An "emergency fund" if you will. And as suggested above you can certainly keep more than that if you like.