Bob Nelson – Cash Reserves

Thanks so much for checking out the Real Estate Today podcast. Right now we’re going to talk about cash reserves.

Featuring:
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker

Marcia Edwards: We’re talking about residential investment property. This is Bob’s wheel house. It’s a fun conversation to have. We’ve been talking about the five mistakes to avoid when buying rental properties. We’ve got a couple in hand behind us. One was analysis paralysis, understanding what numbers matter and what don’t and how to look at them with the lens that will bring you success going forward with those rentals. Also, cursory due diligence. Cursory due diligence is when you’re looking too superficially at the numbers or at the property itself. You’ve got to make sure you get inside every unit. Let’s talk now Bob a little bit about the reserve accounts, the cash reserves that you should expect to have in hand when you go into an investment.

Bob Nelson: Well, first of all, I take a look at it this way. If I had a mortgage payment of $1000 a month, let’s put aside two mortgage payments, $2000. Let’s actually put it in a savings account and pretend that we don’t have it. Now, it’s absolutely there and I could dip in if I needed to, but as I do that, I understand that I’m putting myself in a more dangerous position.

Bob Nelson: What would then happen also if you wanted to take on a lesser amount of risk, what would happen if I actually made two mortgage payments in advance? That’s possible to do that. Make sure that when you’re doing it that you send in the payment stub for the next month. Don’t just add $1000 to the current payment that you’re making. All that will do is pay the principle down on your property.

Bob Nelson: If I’ve done that, I’m two months ahead, and I’ve got two more months, sitting aside in a reserve account, I could actually have 100% vacancy for a period of four months and I would be covered. I’m going to feel real edgy, but what do I do during that four month period if I discover that I have a real train wreck on my hands, I would run to Marcia and say Marcia, sell this rental house for me please. Have it done within a period of four months. If you can’t do that, there’s something horribly wrong.

Marcia Edwards: Bob, what about the reserves for things like roofs? I don’t really want to set $20000 aside and just sit on it for too long.

Bob Nelson: First of all, investors don’t set aside reserves for capital improvements of that nature. Now if you know that you’re going to do the roof next year, yes that’s possible, you could set aside a certain amount. In the main, what we would do is set aside a credit line that we would borrow and actually borrow against the property and the credit line to do the roof.

Marcia Edwards: That is great information how to manage the accounts beyond just the purchase price.

Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30 on KPNW for the “Real Estate Today” radio show.