Uncommon Financial Wisdom

How Much Is A Good Night’s Sleep Worth To A Real Estate Investor? Thou$ands May 16, 2008

Today I have my first guest poster. I would like to introduce Jeff Brown of Brown and Brown.  He is a long standing real estate broker specializing in investment real estate. I asked him to post on a subject of great importance to him and me, cash reserves. If you look at the recent batch of foreclosures one thing stands out to you. These people had little or no cash reserves to take them through the bad times. If you want to talk to him directly he now has a link on this page. Please go to it if you have any interest in building wealth.
Thanks, Jeff for this post!
Dave Shafer

How Much Is A Good Night’s Sleep Worth To A Real Estate Investor? Thou$ands

It’s a perfect time to revisit the concept of cash reserves, which we at Brown & Brown call a Sominex Account.  Sominex is a brand of sleeping pill. Get it? A generous cash reserve
account allows us to sleep even when life’s little surprises land at our
doors. Of all the factors involved in real estate investing, cash
reserves almost always get short shrift. As an integral part of every
Purposeful Plan, cash reserves cannot be ignored. It’s easy getting
caught up in the various opportunities these days. In a buyer’s market
investors tend to get not only a false sense of
security, but superiority. Memories are short, aren’t they?

In the best of times cash reserves are a must. There can be no
debate on this point. Brown and Brown has been touting this from every
mountain top we can find. If reserves are a must in the best of times,
how critical are they today? Right, don’t answer cuz that was a
rhetorical question.

Our company policy is very clearly stated: No Sominex Account
means we can’t work with you.

Why such a ‘take no prisoners‘ policy? I’ve lost property
myself, and it ain’t fun.

The question arises — how much in cash reserves do I need? That
depends. But here’s the rule you surely want to follow: Error on
the side of too much, not too little. It’s just common sense.

If you’re a big wage earner and don’t live up to your eyeballs you may
not need as much as certain others. Still, Murphy knows where all of us
live, and sooner or later it’ll be your turn in his barrel. Count on it,
as nobody escapes The Barrel.

If we could prepare for these random attacks of real life, I wouldn’t be
recommending you harbor such generous cash reserves. See how it works?
Preparation isn’t possible, hence the reserves. 🙂

Also, if you’re looking to get a deal on some of the builder inventory
around the country, you should pad your Sominex Account. Here’s why.

Though sometimes builder properties come with refrigerators, window
coverings, and complete landscaping, sometimes they don’t. If you’ve
acquired a 3 bedroom home, an apartment sized refrigerator just ain’t
gonna cut it. A side by side will cost you at least a grand, and
probably more. Window coverings shouldn’t be had on the cheap either, as
they should be congruent with the quality of the property and tenant.
Landscaping is often the difference between a potential tenant stopping
and looking or driving by to the next place on their list.

Many of our clients invest in several properties each in multiple
locations. Knowing in advance how many properties with which you’ll end
up is obviously crucial to the decision on the size of your Sominex
Account. For instance, in certain regions most of the tenants assume
they must have their own refrigerator. (80%) Since some builders
willingly pay some or all of the buyer’s closing costs, the investor has
already saved between $3-7,000 per property. That alone can finance an
appliance, and maybe some window coverings. If you’re really fortunate
the builder will deliver the place to you fully outfitted, landscaped,
and devoid of closing costs.

The fly in that sweet honey is the dim view most (all?) lenders take.
Most will put a ceiling on what they label as buyer credits. Usually it
tops out at around 3%, though not long ago there were some allowing 4-5%.

Still, if you’ve allowed for a generous Sominex Account, the savings you
reap from investing in multiple builder properties can actually add up
to an extra property or two. We recently had a client who was able to
acquire an extra property due entirely to credits and savings in
upgrades. It matters.

You’ll notice I haven’t set up a specific formula for the purpose of
calculating the size of your reserves. And you’ll not see one here. Each
investor is different, with different financial circumstances, earning
power, and sometimes most importantly, different comfort zones. Here are
some examples of Sominex Accounts I’ve recently approved.

Client acquires 4 properties and has $100,000 income —
$35,000

Client acquires 4 properties with $60,000 job — $50,000

Client invests in $10 Million of property — $300,000++

Client acquires 2 properties with $48,000 job —
$40,000

Your Sominex Account should be established both in size and in deed
before you make the first offer on any property whatsoever. If you must
decide between getting that extra property at the cost of thinning your
reserves — always, sans a guaranteed cash windfall in the very near
future, land on the side of your reserves.

When it’s your turn in The Barrel, you’ll be sleeping too
soundly to care.