From year to year, the range doesn’t change much, though in extreme times, it skyrockets. I’m talkin’ about the percentage of people I counsel to sit tight. Don’t do anything. Cool it a bit. It consistently remains in the 30-40% range, give or take some. The main reason? Aside from those who simply don’t sport the required capital, the reason used most by me for that counsel is lack of cash reserves. Over the years I’ve called it the ‘Sominex Account’. Sominex, for the Boomers’ kids was (still is, I think) a brand of over-the-counter sleeping pill. Yeah, I know, pure corn. Cash reserves allow you to sleep better as an investor.
Much of the so-called new and improved thinking pays little homage to the concept. Murphy is some guy your grandpa used to ramble on about. Somethin’ about bad luck, right? If anything shows respect for the inevitable, it’s having generous cash reserves as a serious, long term real estate investor. Though the last one happened over three decades ago, I’ve lost three properties. Wanna know a secret? All three were a direct or indirect result of having insufficient cash reserves.
Experience and cash reserves
There isn’t a substitution I’ve found, except for the presence of richer than God, Aunt Ethel. And she’s way too smart to be your backup. Folks often think I only tell newcomers not to invest due to this principle. Not so. I tell ongoing clients all the time. Matter of fact, I saw me do it twice just this past weekend. Things change, Someinex Accounts dwindle. When this happens and they call to tell me they’d love to acquire more property, I ask the question.
“How’s your Sominex Account doin’ lately?” “Well, (fill in the blanks here), so it’s down to around half of what it was.”
It’s almost always at that point I tell ’em not to buy any more real estate ’til that account is built back up. Sometimes this occasions further protestations of how quickly the account will rise. In many cases I know that to be accurate. Still, I merely respond with glee, asking them to please call or write me when that day arrives. But ’til then, let’s keep it on ‘glide mode’, ok?
Allow me a confession
Though I say the Sominex Account is so my real estate investor clients can sleep at night, that’s only partially true. In fact, it’s not even primarily true. The paramount reason I insist on generous cash reserves is so I can sleep at night. Investing for your retirement income is not only a singularly serious undertaking, putting it at risk unnecessarily is silly — and that’s being kind. The vast majority of us put the spiritual, family, and health on the top of our ‘A’ list. However, the retirement income we create through our own efforts has to be on that list too, and not too far down either.
Don’t ever risk your retirement by having inferior cash reserves. It’s not a sexy subject, I know. Frankly, when I talk about it publicly, most folks hope I gloss over it. I know, cuz I can see it in their eyes. But since I’ve experienced what I never want them to understand, I usually quote Dad, after I’d lost the last property I’ll ever lose.
“Son, I love ya, and Lord knows you’re smarter than the average bear. But man, sometimes you’re a slooooow learner.”
It’s about OldSchool, and being safe, while gettin’ things done, and checkin’ boxes off your list. What it’s not about, is seein’ your dreams of a magnificently abundant retirement crash on the rocks, just as you thought it was time drop anchor, and retire. Maintaining a very generous cash reserve isn’t a luxury — it’s often the very reason so many still make it to retirement after they’ve defeated Murphy’s best efforts.
Repeat after me: Generous cash reserves — no exceptions.