What is your cash to mortage ratio?

Question

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?

Sharad M. · Answer

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?

Bryan Hancock · Answer

Yes....it would NOT be included in a cash to mortgage ratio.  It was extra commentary based on other questions posed in the thread.

Your cash to mortgage ratio is what it is.

Bryan Hancock · Answer

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.

Sharad M. · Answer

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?

Bryan Hancock · Answer

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.

Jordan L. · Answer

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.

Bryan Hancock · Answer

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.

Bryan Hancock · Answer

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.

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.

What is your cash to mortage ratio?

Most Popular Reply