Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
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high yield savings account, very boring, very low yield, very safe, and can be withdrawn quickly.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.
Omaha, NE · Member since 2020 · 612 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.)
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.
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.
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!
Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
4y
I use a stock equity line of credit. It allows me to borrow against 65% of portfolio value. This way my opportunity cost is 0% when I don't need the fund and because I will allocate a % of my wealth in stocks anyways, and 3.5% interest when I need it. Out of every year, the money weighted chance of needing to tap into my reserve is probably 0.5 month. So 0.5/12*-3.5% + 11.5/12*10% = 9.4% return if I assume annual stock return avg 10%. If I had put that money in a high interest saving it would have earned me around 2-2.5%. Just trying to demonstrate to you that LOC is the way to go.
Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
4y
@Jody Sperling Interesting concept about utilizing infinite banking for reserves. Do you recommend any good companies out there offering whole life insurance to real estate investors? I'd definitely like to review my options more with some reputable companies.
@Jody Sperling Interesting concept about utilizing infinite banking for reserves. Do you recommend any good companies out there offering whole life insurance to real estate investors? I'd definitely like to review my options more with some reputable companies.
I like the team over at Living Wealth. You can ask for Cy Kueffer. They base their policies on Nelson Nash's becoming your own banker. Tom Rutkowski is another guy I'd be interested to talk with. I believe he's commented in this thread. He designs policies a bit differently, using indexed life, if I recall, and I can't speak to that product as informedly.
Rental Property Investor · Denver, CO · Member since 2019 · 78 posts · 66 votes
4y
@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.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
4y
what is the likely hood that assets may not be able to pay their expenses? well...... I dont know but Covid has created scenarios where a tenant did not have to pay rent for over a year and if a LL didnt have reserves they would of been in trouble. Also at the height of the crises (Nov - Feb last year) people were not moving so leasing up was taking longer than normal AND rent had to be lowered to entice folks to rent..... this can put a huge damper on cash flow..... so yes, it can happen. Having cash available can really help alleviate the stress of "how do I pay for the assets expenses (including mortgage payment) and my own expenses that rely on tenants paying rent when they are not paying? Reserve funds are critical at these times. Remember that any time you ask your mortgage company for forbearance it affects your future ability to borrow.......
Anyway..... I vote for a cash reserve account with 6 -12 months of expenses saved. :)
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
4y
@Deanna Opgenort
Be careful with HELOC as banks have closed them without notice in the past. It is disastrous to discover it when you need the money that they froze your line. So don't put all your faith in it. They are good products and I am using them, but I don't count them as emergency reserves.
Same with brokerage margin accounts. brokers change the margin level when a stock become volatile, and a margin call can be catastrophic for your account when you have to fire sell.
I use a stock equity line of credit. It allows me to borrow against 65% of portfolio value. This way my opportunity cost is 0% when I don't need the fund and because I will allocate a % of my wealth in stocks anyways, and 3.5% interest when I need it. Out of every year, the money weighted chance of needing to tap into my reserve is probably 0.5 month. So 0.5/12*-3.5% + 11.5/12*10% = 9.4% return if I assume annual stock return avg 10%. If I had put that money in a high interest saving it would have earned me around 2-2.5%. Just trying to demonstrate to you that LOC is the way to go.
This works great in theory, but needing your reserves and a decline in the equities market have some covariance, so if someone wants to do this the amount of reserves you'll need are larger than if you kept them only in an FDIC insured savings account.
The market going down isn't correlated with your HVAC going out, but it is linked to something like COVID where your tenant stop paying and you need the cash now, but the margin loan you can get has gotten cut in half. Or if you took a margin loan and the market/ the securities you hold dip, you'll get margin called.
There are plenty of ways around this, but it takes some additional steps.
Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
4y
@Bill F. you missed the point which is that I allocate a portion of equity anyways so the LOC is a freebie. It works because the LOC is larger than I need for reserve, so a drop in equity market will unlikely matter for the reserve. As to your correlation observation, I agree, so SLOC might not be as good as a HELOC for this reason.
Rental Property Investor · Depends on where my employer sends me · Member since 2018 · 171 posts · 142 votes
4y
These are all great posts and I have heard both sides on having a whole life insurance policy and my main purpose on getting a policy was in case something happened to my wife and myself. I love my W-2 job and have no plans on quitting but my job also takes me to places such as Iraq (worked in Kurdistan and Baghdad from 2015-2018), Somalia, CAR, and Pakistan and there is an inherent risk of terrorism, political unrest. Should something happen to me what happens to my family? My wife is expecting our second child while we are in Spanish language training for our next assignment overseas so she doesn’t work. My policy combined with my rental portfolio gives my wife the flexibility to ease back into the workforce without having the additional burden of worrying about money. I also have a policy for me wife and plan on opening one for my daughters….albeit a smaller premium.
The thought of viewing the accessible funds in my policy as cash reserves for my rental properties never occurred to me as I keep my rental cash flow in a credit union account that I never touch ( a chronic cheap shake) . I just looked at my policy as another way to fund BRRRR deals (combined with private money from family/friends and a line of credit from a credit union). That being said thank you all for the post as I might shift some of the excess cash reserves from my rental income into this policy as opposed to simply funding it from the excess cash I earned in previous assignments overseas.
Rental Property Investor · Tulare, CA · Member since 2020 · 23 posts · 19 votes
4y
@Adam Widder
If you don’t want to just store it the old fashion way in a bank, I’d say go IBC! I have an IBC policy and it was one of the best decisions I made outside of my wife and kids . I used my policy to make my down payment on my first property. Very powerful tool if you understand it. Good luck!
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
4y
@Adam Widder - you can decrease your reserves when you have more assets because the likelihood of all of your assets failing to perform AND you not generating excess cash flow from your w2 job / other income is very low.
Evaluate your worst case scenario and your backup plans to determine the amount of low return cash reserves that are appropriate for you.
I have determined that 0% interest reserves in savings account beyond about $5000 are unnecessary for me, regardless of how many properties I have. You may decide this amount should be 2 months of PITI per property plus the cost of one roof or one Hvac system (depending on your financing options).
Like Allen said, I can borrow cash money from my stock account (td Ameritrade) without selling. The margin loan is at like 8-10% APY depending on the amount borrowed and I can borrow at least 50%. My VOO (s&p500 index) is up 25% year to date. I look like a genius for maxing my cash out refinances at 3.5% for 30yr fixed. Why wouldn’t I want every spare penny in something that will grow as inflation grows?
I also have 0% credit cards with large available balances or can easily get some with 12-18 month 0% runways if I anticipate a large purchase such as a HVAC system or property turnover-rehab (paint, flooring, etc.)
Over time, my money will grow a lot more than if I’m holding $30-50k in cash at 0% (which with today’s 6-7% annual inflation is actually losing a lot of purchasing power).
If you have other income such as a w2, this also serves as a buffer where you could tighten your discretionary expenses in a worst case scenario to continue to keep current on all your bills, thereby needing less in cash reserves to maintain your portfolio.
I’ll admit I’ve never experienced owning properties and having them vacant (or non paying) for more than two months. So I can’t relate to people losing 10+ houses in the Great Recession. I am super aggressive about putting someone in there. In New Jersey, if you make any kind of payment they will usually defer foreclosure for a long time (24+ months). Ultimately for owners, Vacancy is a killer. Rents are unlikely to fall especially now that inflation is ticking up.
Investor · Hayward, CA · Member since 2015 · 83 posts · 72 votes
4y
I keep about half of my reserves in gold and silver. Extremely liquid and zero counterparty risk. It’s hard to know how many banks have derivatives that will hit them just like 2008.
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
4y
@DongHui Patel the infinite banking life policy is different than your traditional whole life policy. Agreed, the whole life policy are not advantageous, especially on fees.
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
4y
@Justin R. That's very true. I could borrow against another asset mix type vs just borrowing on the policy. It's not the only option. It think there's additional benefits that make the infinite banking attractive.
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
4y
@Marcus Auerbach This thinking is what lead me down this path. there's 0 chance, a person with 20 rental properties or 100+ doors is setting aside 6 months of PITI/property in a savings account. It would be a huge number just getting destroyed by inflation. My lender and I spoke about the same logic too, once you have x reserves set for your portfolio, the odds of all being vacant are slim.
Line of credit is a good option as well, then I could just use that for a rainy day fund.
BTW - I'm originally from MKE man, go brew go pack!
I keep about half of my reserves in gold and silver. Extremely liquid and zero counterparty risk. It’s hard to know how many banks have derivatives that will hit them just like 2008.
My problem with metals is that they don't cash flow and they are actually not really liquid exactly when you may need them to be, i.e. currency crash. Gold in particular at $20,000 for a 10oz bar is not practical. Silver coins/rounds might be more useful at $25/oz when you want to buy some food...
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
4y
@Wesley Whitehead glad someone else is learning to, power of BP+community. I'd make sure your whole life policy is designed in the correct manner. See some of the comments on where to get it designed properly. You can't just use a standard whole life policy for IBC.
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
4y
@Jordan Harrill Thank you! Glad to see someone who's done it. That's where I think the issue lies mentally is that not a lot of people have heard or personally used IBC but the ones who do are like addicts lol. I have a buddy locally who does it as well and is using it to fund the renovations for his flip. So he's paying himself twice basically.