We're going on 3 properties, and I'm wondering where others store their reserves for their rental properties? My general rule of thumb was 6 months of PITI, which I have in a savings account. As we go to 3 properties, this amount is now enough to purchase another property! So there has to be a better way to store this money. So far I've been researching putting it into a: high yield savings account, very boring, very low yield, very safe, and can be withdrawn quickly. Mix of a stock/bonds in a taxable investment account, shoot for a 4-6% return. Better return, liquid, but if i needed the money, I'm taxed. Infinite banking. My understanding is I could over time, fund the policy annually, have a cash balance I'm able to use right away, have an immediate death benefit, and it gains 4-6% growth, and I can take a loan against it.

Call me risky, but if you have quaility properties 6 months of portfolio PITI in cash reserves is way too much. On property yes, okay, but not for the entire portfolio. What are the odds that you loose all 3 tenants at the same time and can't replace them for 6 months? The properties become their own reserve: if you have one vacancy, the 2 other properties will cash flow enough to cover the one (at least here in Milwaukee). So you really only need reserves in the event 2 go vacant (that's 66% of your portfolio). As your portfolio grows, you can reduce the amount, because the odds that all properties are effected the same time is pretty slim. If you buy a 4th property, you are still 50% occupied with 2 vacancies, so that probably means your portfolio will be slightly negative in cash flow until you have filled at least one of them. We currently fill vacancies within 1-2 weeks on a new property. On a turnover we have a new tenant lined up when the old one leaves, so no vacancy at all. Your worst case scenario is really an eviction, where you don't get rent and can't replace immediately. Keeping reserves also comes with an opportunity cost, the deal that you did not make. And then there is inflation - 6.2% now. So holding cash is also a bad idea from that point of view. The best reserves are those that don't cost you anything, which is a line of credit. I would only hold cash reserves for scenarios that I would classify as "likely" and a standby LOC for "unlikely" events. There is a sweet spot when you balance the two, cash and LOC, and as your portfolio, your net worth and your comfort grow you can shift more towards LOC. You can do a "stress test" on a spreadsheet and calculate different scenarios and see how much you need. Find a sweet spot that is supported by both math and your personal risk tollerance!

EXACTLY! Thank you for pointing this out. You can just as easily and just as liquidly borrow on a margin account. IBKAR charges a mere 1.5% and you can margin up to 85% (I think) of your portfolio. I wouldn't recommend that much leverage but if you are borrowing less than 50% of a diversified portfolio your chance of margin calls are negligible. And this is without long term commitments, high fees, complicated contracts and annoying insurance sales people. And its not taxable and interest may even be tax deductible.

@Adam Widder. Stablecoins earn about 9% annual yield via BlockFi or Gemini. Their pegged to the US Dollar. With a few more steps you can get anchored UST that earns roughly 20% APY, auto compounded.

@Adam Widder Like all things, you should be a good steward of IBC policy. When you take a policy loan you’re not actually taking your own cash value out, you’re taking a loan against your cash value while your money continues to grow. So it’s the insurance company’s money that you take out and like all loans, they want to be paid back as well. That’s a common misconception people have about IBC. Again it’s a very powerful tool if understood how to use it correctly, and efficiently.

Where to store rental reserves?

Jody Sperling

Omaha, NE · Member since 2020 · 611 posts · 665 votes

4y

I am not an insurance salesperson. I've never been licensed in health and life, and none of the below is advice, but a slice of my experience. I own and use whole life policies, and I couldn't be happier.

The fact that you listed infinite banking is game-changing. It can be so frustrating to try explaining why high cash value whole life insurance policies are so powerful. Initially, it puts a small drag on your cash reserves and cash flow, but when the system is at full efficiency, after the third year you have such a profound advantage over other investors.

Any year could theoretically prove this wrong, but my policies have been averaging 6.5% growth after factoring in the dividend. 4% of that is guaranteed, so even if the insurer had a terrible year, I'm 100% certain I get my money. And loans are liquid and easy to get ahold of if you need them to pay for emergencies.

Remember how people were pissed at Elon Musk because he was living on loans from the growth of his stock in Tesla and therefore not paying any taxes? Well, you can do the same thing with your life insurance policy and you don't have to be a billionaire. Remember how Bill Gates lost half his earthly possessions when he divorced Belinda. Well, he'd've been shielded from that loss if it was held in a whole life policy. Remember how companies lose everything when they file bankruptcy? Well, if they have whole life policies, the money can't be surrendered or taken. (Check some of these claims as rules vary state to state, but it's sufficient to say, the protection offered by policies is another great reason to love them.)

16 Reply

Thomas RutkowskiPro Member

Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes

4y

@Adam Widder

You summarized the options very well. Understand that in a properly designed, maximum over-funded life insurance policy about 85 cents of every dollar goes to the cash value. That means you have a choice between 100% of your savings earning 0.5% or having 85% of your savings earning 5 to 6%. I think its an easy decision to make.

Stocks/bonds really have no place in a reserve account. Its not exactly liquid when the market is down 40%.

8 Reply

Mike S.

Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes

4y

Originally posted by @Jody Sperling:

Any year could theoretically prove this wrong, but my policies have been averaging 6.5% growth after factoring in the dividend. 4% of that is guaranteed, so even if the insurer had a terrible year, I'm 100% certain I get my money. And loans are liquid and easy to get ahold of if you need them to pay for emergencies.

In a whole life, don't forget that the real IRR is not the guaranteed + dividend rate. This rate is before the multiple fees. You should expect in a properly overfunded Whole Life a long term IRR of 3 to 5%. If you use an Index Universal Life, the yearly rate will fluctuate widely from 0 to the cap of the index that you used, but you should expect a long term IRR of 4 to 7%.

I agree that they are great tools to have for managing your wealth as they are liquid, safe and with moderate growth. I am using them myself and as you can see in my posts, I am recommending it. But they are not for everyone as they are complex tools that need some proper planing. But if used properly, they can be a great wealth multiplicator while adding financial safety to your family.

4 Reply

Maurice D.

Coppell, TX · Member since 2015 · 485 posts · 310 votes

4y

if you go stock market, make sure you have setup stop loss triggers on your portfolio for WHEN it goes down.

3 Reply

Adam Widder

OP

Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes

4y

@Thomas Rutkowski Can you explain the --

"That means you have a choice between 100% of your savings earning 0.5% or having 85% of your savings earning 5 to 6%."

0 Reply

Adam Widder

OP

Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes

4y

@Jody Sperling Are you currently doing this then?

So the monthly contribution is going into the policy, earns the minimum 4% (upwards of 6.5%). Of the monthly contribution, 85-90% of it is available as cash value you can take a loan against.

Therefore, that loan can then go to work. Example, I use it to fund renovations on a flip.

In your last paragraph, you're saying the money is protected from lawsuits or other life misshaps?

2 Reply

Thomas RutkowskiPro Member

Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes

4y

@Adam Widder

Every dollar of premium is turning into 85-cents of cash value. But if that cash value is growing at 5.5% and the same amount of savings in a bank account was earning 0.5%, you'd have a graph that looks like this:

2 Reply

Adam Widder

OP

Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes

4y

@Mike S. Can you explain plainly IRR?

2 Reply

Mike S.

Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes

4y

@Adam Widder

IRR: internal rate of return. It is a metric that we very often use in real estate as it give you the effective rate of return that you would need with the same amount of investments over the same period of time to get the same result. It takes into account the cost of money and the timeframe of the payments.

For me it is one of the most important metric for all my investment with risk factor, duration of investment, liquidity and taxation.

2 Reply

Adam Widder

OP

Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes

4y

@Mike S. what's the formula? Or ya got a real estate example?

0 Reply

Adam Widder

OP

Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes

4y

@Thomas Rutkowski is the whole dollar earning the 5.5%?

Nice graph and have a copy of the webinar?

1 Reply

Thomas RutkowskiPro Member

Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes

4y

Originally posted by @Adam Widder:

@Thomas Rutkowski is the whole dollar earning the 5.5%?

Nice graph and have a copy of the webinar?

In a properly-designed, maximum over-funded policy, 85-cents of every dollar of premium goes to the cash value. 85-cents is earning 5.5%. That is why the graph shows the curve starting at $850. You start off a little short, but you make it up very quickly.

Thesis of webinar was this: A Maximum Over-funded Life Insurance Policy is the best place to store your emergency fund because it allows you to maximize your return potential while minimizing risk and maintaining liquidity.

2 Reply

Joe S.Pro Member

Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes

4y

You said you had enough to buy another property. That be a hard opportunity for me to pass up.

2 Reply

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

4y

I would keep it accessible and safe..... especially if you want to expand your assets you may run across a loan that requires x amount of reserves to be held (by them) in escrow (this happened to me and they took all my reserves I had saved!!) . Calculate what you "comfort amount is" and keep it liquid... the balance can go in other vehicles but nothing too fancy or volatile...

1 Reply

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

4y

Originally posted by @Joe S.:

You said you had enough to buy another property. That be a hard opportunity for me to pass up.

the point of reserves tho is easy access to the funds to repair/replace some kind of capital outlay (roof, etc) how would buying another property allow this to be feasible?

I learned during covid to have cash in the bank.... at least 6 months - a year is better to pay all expenses comfortably - because you just never know. but I live off my rental income so having those funds in the bank means not only can i pay my assets expenses but my personal ones as well.......

3 Reply

Joe S.Pro Member

Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes

4y

Originally posted by @Mary M.:

Originally posted by @Joe S.:

You said you had enough to buy another property. That be a hard opportunity for me to pass up.

the point of reserves tho is easy access to the funds to repair/replace some kind of capital outlay (roof, etc) how would buying another property allow this to be feasible?

I learned during covid to have cash in the bank.... at least 6 months - a year is better to pay all expenses comfortably - because you just never know. but I live off my rental income so having those funds in the bank means not only can i pay my assets expenses but my personal ones as well.......

Good point Mary

1 Reply

Mike S.

Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes

4y

@Adam Widder

There are pages and pages of information that you can find online about IRR. I even believe that there were blog posts on it on BiggerPockets.

0 Reply

Luciano A.

Developer · Houston TX · Member since 2018 · 423 posts · 400 votes

4y

@Adam Widder

Congrats on getting three properties. You are still growing so I would give you this advice...KISS (Keep It Simple Silly) the last S stands for Stupid when I have to remind my own self.

Take the money, put it into a credit union or local bank that works with investors. As your reserves grow it will help create a relationship with that bank thus when it's time to go ask for a loan you will have already established this relationship. Small local banks will look at your relationship with them, the amount of money you have with them when they have to make a decision. My local banker uses my relationship with their bank as a way to get my loans approved when he takes my loan to the committee and tries to sell to his board why they should take my loan.

Money sitting in an account might be dumb given inflation and IRR arguments but relationships will lead to deals, the ability to do deals, etc.

Best of Luck

3 Reply

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

4y

for those wanting to understand IRR.... i had a really hard time wrapping my pea brain around it.... I had a block I guess... there were a couple people on BP that helped me but this video is simple and I finally got it! This channel has a lot of great info for free!! its taught me a lot - and no I am not affiliated in any way....just sharing https://youtu.be/OSDDrZZaV8E

4 Reply

Deanna O.

Rental Property Investor · San Diego, CA · Member since 2010 · 366 posts · 314 votes

4y

I have a HELOC that is still in the draw phase, so that's the obvious storage spot for RE emergency funds/storing tenant deposits (know your state's tenant deposit laws though!). Interest-tracing rules makes it a pain to "store" personal $ in the HELOC pay-off, though the tax-free status of "money saved" vs "money earned" sure makes it tempting. I've also been looking at I-series bonds for the "emergency" fund for $ for personal income emergency. If I have to give up some interest income in a true emergency, that's just a cost of doing business. For a safe, liquid investment my only regret is the Series I treasury bonds limit you to $10k/person per year (calendar year though, so I could put in $20k in the next 2 months. A couple could put in $20k, and if you overpay your taxes by $5k you can put that refund in I-series bonds as well. Current returns are pretty high (7%-ish?).

1 Reply

Ben Zimmerman

Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes

4y

You can get flat rates of between 10-14% annually with stablecoins on various platforms like Celsius, Nexo, or Crypto.com. Some of the platforms you have instant access to your funds whenever you want, and some of them require locking it up for 1 or 3 months at a time. Or 5-6% interest on gold if you're super worried about inflation.

Alternatives include an empty Heloc, or an M1 Borrow account with M1 Finance. M1 Finance is a stock brokerage platform similar to Robinhood, but the difference is I can get a loan of up to 35% of my stock portfolio balance, with no credit check, no application process, and the money is in my account within seconds at an interest rate of 2% annually. So hypothetically if you had a 100k stock portfolio, and you assume a worst case scenario where the market suddenly drops 50%, now you have a 50k portfolio and can access $17,500 within seconds at a stupidly low 2% APR with no set repayment schedule. Or conversely you have access to 35k in funds if the market isn't tanking at the same time you need to replace that roof.

4 Reply

Daniel SmythPro Member

Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes

4y

@Adam Widder

You get more return lending as a hard money lender.

Short term lending allows you liquidity in good time without fees.

You could also invest that reserve into a new roof or other bigger expense that might be coming soon. It's always cheaper today than next month!

I hate the idea of extra cash in bonds or the bank. Make that money work for you.

Invest, don't speculate!

Buy an attorney and lend money for a short term. Yes, you too can be a private lender!

[email protected]

1 Reply

John Teachout

Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes

4y

Reserve funds should be safe and readily accessible. "investing" them sort of defeats the purpose. So, in the bank, even though the interest rate is awful is probably the most sensible place. Putting money in stocks or crypto is a diversification plan but not an emergency reserve as those can create their own crisis.

5 Reply

DongHui Patel

Member since 2021 · 95 posts · 30 votes

4y

@Adam Widder

I have done a ton of analysis on this.

Whole life policies are terrible riddled with fees and generally are terribly investments. I spent 30 hours on the whole trying to get out of this terrible policy.

Yeah they're shielded from bankruptcy. But if you're not close to this the fees and limited investments which are also high in fees make no sense.

I was conned into one of these and after 10 years of fees to the insurance company I was stuck in the policy. I'm just letting it ride cause I'm stuck.

I have term life and invested the rest in a taxable trading account with a mix of stock and bonds.

Now for your question. Stocks and.bonds are not a good option, you could loose a ton if another crisis happens. Unless you buy puts and calls to limit losses. Or put stop losses in just in case. Trailing stop losses let u get the upside and when they start to drop a certain percent they sell automatically.

3 Reply

Justin R.

Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes

4y

Originally posted by @Adam Widder:

Infinite banking. My understanding is I could over time, fund the policy annually, have a cash balance I'm able to use right away, have an immediate death benefit, and it gains 4-6% growth, and I can take a loan against it.

Note that "Infinite Banking" works by borrowing off of any asset, not just a life insurance policy. You can solve for the same goal by, for example, buying a conservative bond portfolio and borrowing against it. Different assets work best in different situations. I'll leave the details for people to research themselves.

If my sister asked me, I'd point her towards a municipal bond portfolio with margin borrowing. It's what I do with inactive capital. YMMV.

3 Reply

Where to store rental reserves?

Where to store rental reserves?

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