Investor · Newbury Park, CA · Member since 2010 · 80 posts · 19 votes
Is there a general rule? Should you have enough to pay off the mortgages if you have too? Or enough to cover all properties if they remain empty for a certain period of time?
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Originally posted by Bryan Hancock:
I’m talking about everything….securities, commodities, personal assets, derivatives, closely-held stock, access to lines of credit and private money, etc.
The more liquid you are in these areas the less cash you need to keep on hand. Note that many real estate investors keep lines of credit so that they have to hold less cash. Holding cash is “investing†in dollars, which has a terrible return. It helps you sleep better at night though!
Bryan,
I am a little confused. Where do you show access to line of credit on your Balance Sheet?
When you do access line of credit, isn't that really a wash between assets and liabilities and net to zero?
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
The general rule I hear about from bankers is 1 dollar of cash for every 10 dollars in long-term debt is the CEILING. Beyond that you will have a harder time borrowing money.
How much cash to keep is really a personal decision and depends largely on how the rest of your balance sheet looks.
Investor · Newbury Park, CA · Member since 2010 · 80 posts · 19 votes
15y
Originally posted by Bryan Hancock:
The general rule I hear about from bankers is 1 dollar of cash for every 10 dollars in long-term debt is the CEILING. Beyond that you will have a harder time borrowing money.
How much cash to keep is really a personal decision and depends largely on how the rest of your balance sheet looks.
When you say rest of your balance sheet, are you talking about other RE or your cumulative assets like stocks and mutual funds?
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
I’m talking about everything….securities, commodities, personal assets, derivatives, closely-held stock, access to lines of credit and private money, etc.
The more liquid you are in these areas the less cash you need to keep on hand. Note that many real estate investors keep lines of credit so that they have to hold less cash. Holding cash is “investing†in dollars, which has a terrible return. It helps you sleep better at night though!
Investor · Newbury Park, CA · Member since 2010 · 80 posts · 19 votes
15y
Originally posted by Bryan Hancock:
I’m talking about everything….securities, commodities, personal assets, derivatives, closely-held stock, access to lines of credit and private money, etc.
The more liquid you are in these areas the less cash you need to keep on hand. Note that many real estate investors keep lines of credit so that they have to hold less cash. Holding cash is “investing†in dollars, which has a terrible return. It helps you sleep better at night though!
What do you mean, the more liquid? You mean, having more stocks that you can cash out?
Also, from an argumentative point of view, is there that big of a difference between having lines of credit vs cash on hand? The former is that if you access it, then you're obligated to pay it off with interest involved. And if you miss payments for whatever reason, there are penalties involved. With cash, you can use it any which way, and if you don't use it, you're just paying a theoretical opportunity cost.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Originally posted by Jordan L.:
What do you mean, the more liquid? You mean, having more stocks that you can cash out?
More liquid means that the assets are more easily convertible to cash quickly. Real estate is highly illiquid. Securities that trade on large exchanges are extremely liquid, but subject to swings in prices. Closely-held stock is generally highly illiquid too.
Originally posted by Jordan L.:
Also, from an argumentative point of view, is there that big of a difference between having lines of credit vs cash on hand? The former is that if you access it, then you're obligated to pay it off with interest involved. And if you miss payments for whatever reason, there are penalties involved. With cash, you can use it any which way, and if you don't use it, you're just paying a theoretical opportunity cost.
I don't plan to miss payments so that really isn't an issue for me. Credit lines with debt service certainly carry more risk than using cash. The return on your cash should trump the cost of renting money on a line of credit though.
The opportunity cost is very real, not hypothetical. The biggest risk in life is not taking one and many people pass up years of compounded returns not taking any risk with their cash.
Investor · Newbury Park, CA · Member since 2010 · 80 posts · 19 votes
15y
Originally posted by Bryan Hancock:
Originally posted by Jordan L.:
I don't plan to miss payments so that really isn't an issue for me. Credit lines with debt service certainly carry more risk than using cash. The return on your cash should trump the cost of renting money on a line of credit though.
The opportunity cost is very real, not hypothetical. The biggest risk in life is not taking one and many people pass up years of compounded returns not taking any risk with their cash.
Of course you don't plan on missing a payment. But stuff happens in life, and not just stuff that a 6 month emergency cash stash can remedy. A week ago, I'm sure the investment returns of landlords and utility investors on the northeast coast Japan were kicking arse over those who squirreled their cash in a savings account. Today, that is no longer true.
As for opportunity cost, it depends on if you know what you're doing. Most people are not financially savvy.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
If you are going to worry about catastrophic events like what happened in Japan you'll never find any yield in your investments. Fortunately many of the people on BP are busy educating themselves about being financially savvy.
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Originally posted by Bryan Hancock:
I’m talking about everything….securities, commodities, personal assets, derivatives, closely-held stock, access to lines of credit and private money, etc.
The more liquid you are in these areas the less cash you need to keep on hand. Note that many real estate investors keep lines of credit so that they have to hold less cash. Holding cash is “investing†in dollars, which has a terrible return. It helps you sleep better at night though!
Bryan,
I am a little confused. Where do you show access to line of credit on your Balance Sheet?
When you do access line of credit, isn't that really a wash between assets and liabilities and net to zero?
Investor · Newbury Park, CA · Member since 2010 · 80 posts · 19 votes
15y
Originally posted by Bryan Hancock:
If you are going to worry about catastrophic events like what happened in Japan you'll never find any yield in your investments. Fortunately many of the people on BP are busy educating themselves about being financially savvy.
Well. My situation is this. I just completed purchasing my 3rd rental 1 month ago. It's rented out. I have positive cash flow(though not the amount that typically gets the green light here on this board). I want to buy a fourth. The values of these properties are around 180-200k. I have 300k in cash. My outstanding loans for the 3 other properties are 119k, 149k, 147k all at 30 year fixes 6% and below. My own primary residence is 433k. I like having cash above 300k, just a psychological comfort line. If we purchase a fourth, that will bring that cash to 250k. We could wait a year and save up for another DP, but prices are good now where we want to buy.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Originally posted by Max I:
I am a little confused. Where do you show access to line of credit on your Balance Sheet?
You're right to be confused b/c it is confusing as written. The line would not show up on your balance sheet. The point I was (poorly) trying to make is that the line will help you keep less in cash reserves.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Originally posted by Jordan L.:
I like having cash above 300k, just a psychological comfort line. If we purchase a fourth, that will bring that cash to 250k. We could wait a year and save up for another DP, but prices are good now where we want to buy.
There is nothing wrong with feeling comfortable with that level of cash. If it helps you sleep at night it is money well invested.
If you are looking to conserve cash and still buy more rental look into purchasing property subject-to. You will eliminate the finance requirement of 20 percent equity and the rates will be like OO property. The tradeoff is that you will pay more than you would using your own financing or cash that you later refinance. Everything in life comes with a cost/tradeoff.
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Originally posted by Bryan Hancock:
Originally posted by Max I:
I am a little confused. Where do you show access to line of credit on your Balance Sheet?
You're right to be confused b/c it is confusing as written. The line would not show up on your balance sheet. The point I was (poorly) trying to make is that the line will help you keep less in cash reserves.
Bryan, I see what you are saying but I am not sure if I personally agree with the idea. Relying on lines of credits can be dangerous in this lending environment where thihgs can change from one day to another and your line of credit can dissapear so easily with change in policies.
And as far including credit line in cash to mortgage reserve is concerned, aren't you just swapping one debt for another by using the credit line?
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Yeap...it certainly comes with risk. The balance between how much to rely on the line and how much cash to keep is not an easy one to strike. I'm not advocating keeping no cash...I'm just saying that lines can replace SOME cash if you wish to stretch some at some point in time to make a great deal work.