Preparing for the worst

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Preparing for the worst

Tony Mi
Member since 2019 · 7 posts · 2 votes

I'm studying up on Buy and Hold real-estate investing. So many of the resources discuss how to get the deals, what steps to take to be successful, but I haven't found many that describe what happens on the worst case scenarios and how good investors overcome those issues. For example, how much in reserves should one have to ensure they never lose the property to foreclosure? What sort of savings should you have on each property in case it goes vacant, has to get evicted on, etc? What are the best steps to take if your property is destroyed either by a natural disaster or one hell of a tenant/accident?

Are there any books that cover these sorts of contingencies fully? I know some folks say things like save 6 months of housing payments in case of, but is there more to it? What would be the least prudent to be safe and what would be considered the most prudent?

Thanks,
Tony

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Michael Lewis Lee
Wholesaler · Dallas, TX · Member since 2017 · 306 posts · 133 votes
6y

Hello Tony!  I hope I can answer all your questions effectively.  This message from a man who is 63 and crippled now but was licensed real estate brier in Texas and a construction manager for about 30 years.  Try to prepared for anything that can happen.

I was and wasn’t properly prepared for that brain aneurism and stroke that stroke that happened when I was 54 just two days before preventing surgery thanks to me taking a MRI and saw that problem but before that happened,I was told by my regular Doctor my condition was perfect.  

Even though I had paid off my house in 1996 and my wife was a computer programmer and making decent money it was not good enough for her not to die from cancer at 59.  I was going to say that you need 6 months of payment reserves on all rental units.

You need full insurance on all of your properties that will pay in case of natural disaster.  Maybe an umbrella policy can save you some money.  Natural disaster is kind of one of those “cross your fingers” things.

Being educated continually and being prepared for anything that could happen is almost impossible but you can try.  Do not try to do everything yourself.  Be able to hire others and delegate.  Remove as many distractions as you can.  

Don’t assume anything will not happen where you should be involved or you have any responsibilities.

Worst cases can happen from A to Z.  You can’t be prepared for anything that has to do towards the future is almost impossible to prevent but be prepared for anything that happens.  The more prepared you are, the better.  The more units you own, usually the better and the less vacancy will hurt you.

For rental properties, it is usually proper to have a separate bank account for deposits.  Strict  screening will usually help you in the long run.  Always think long term when renting and always know that people need to sleep at whenever.

Try to save as much as you can to be prepared for anything that happens.  My wife had been saving for about 35 years but it could not save her life or any insurance either. Stuff happens that you cannot control.

Good luck to you!

.

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  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    6y

    Your lender will require that you have a certain amount of reserves before they approve your loan, so that will cover you in an emergency. 

    Everyone calculates their returns and risk differently. What works for me is having a reasonable reserve for each property (mostly SFH and duplexes for me). Basically enough to replace a roof. If you have that much in reserves for each property, you should be in good shape if you happen to need a roof at one place and a furnace at another simultaneously.

    Secondly- make sure you have at least two exit strategies, one of which that is vital is that a property that is cash flow positive if you need to rent it. If you can be cash flow positive if/when you rent, it opens up the ability to use many other exit strategies in the future- you aren't under financial pressure to take a loss when a problem arises. 

    Good luck!

    0Reply
  • Michael Lewis Lee
    Wholesaler · Dallas, TX · Member since 2017 · 306 posts · 133 votes
    6y

    Hello Tony!  I hope I can answer all your questions effectively.  This message from a man who is 63 and crippled now but was licensed real estate brier in Texas and a construction manager for about 30 years.  Try to prepared for anything that can happen.

    I was and wasn’t properly prepared for that brain aneurism and stroke that stroke that happened when I was 54 just two days before preventing surgery thanks to me taking a MRI and saw that problem but before that happened,I was told by my regular Doctor my condition was perfect.  

    Even though I had paid off my house in 1996 and my wife was a computer programmer and making decent money it was not good enough for her not to die from cancer at 59.  I was going to say that you need 6 months of payment reserves on all rental units.

    You need full insurance on all of your properties that will pay in case of natural disaster.  Maybe an umbrella policy can save you some money.  Natural disaster is kind of one of those “cross your fingers” things.

    Being educated continually and being prepared for anything that could happen is almost impossible but you can try.  Do not try to do everything yourself.  Be able to hire others and delegate.  Remove as many distractions as you can.  

    Don’t assume anything will not happen where you should be involved or you have any responsibilities.

    Worst cases can happen from A to Z.  You can’t be prepared for anything that has to do towards the future is almost impossible to prevent but be prepared for anything that happens.  The more prepared you are, the better.  The more units you own, usually the better and the less vacancy will hurt you.

    For rental properties, it is usually proper to have a separate bank account for deposits.  Strict  screening will usually help you in the long run.  Always think long term when renting and always know that people need to sleep at whenever.

    Try to save as much as you can to be prepared for anything that happens.  My wife had been saving for about 35 years but it could not save her life or any insurance either. Stuff happens that you cannot control.

    Good luck to you!

    .

    1Reply
  • Tony Mi
    OP
    Member since 2019 · 7 posts · 2 votes
    6y

    Thank you both for your input. This really helped

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y
    Originally posted by @Tony Mi:

    I'm studying up on Buy and Hold real-estate investing. So many of the resources discuss how to get the deals, what steps to take to be successful, but I haven't found many that describe what happens on the worst case scenarios and how good investors overcome those issues. For example, how much in reserves should one have to ensure they never lose the property to foreclosure? What sort of savings should you have on each property in case it goes vacant, has to get evicted on, etc? What are the best steps to take if your property is destroyed either by a natural disaster or one hell of a tenant/accident?

    Are there any books that cover these sorts of contingencies fully? I know some folks say things like save 6 months of housing payments in case of, but is there more to it? What would be the least prudent to be safe and what would be considered the most prudent?

    Thanks,
    Tony

    I don't know of a book that handles all these things. My recommendation: make a list of issues you think may occur and then start researching them one at a time.

    Reserve is a tricky thing based on a lot of personal factors. If you have one rental with $100 cash flow, a median income, and a baby on the way, you probably want a strong reserve. If you have 20 rentals cash flowing $100 each, make $200,000 a year, and have a $250,000 line of credit, then you probably don't need any reserve.

    Life brings unforeseen expenses. You have to evaluate your personal situation and see how much you can afford before those unforeseen expenses will destroy everything you've built. Develop a plan to mitigate the risk.

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