The Importance of Cash Reserves

By Jeffery S. Watson

Dear Anna,

Last weekend, I spoke to a group of real estate investors about buying properties using a creative financing method. Some of the questions asked reminded me how crucial it is that real estate investors have cash reserves to deal with the unexpected. I consider cash reserves to be “Murphy’s Law repellant” (anything that can go wrong will go wrong). Those who have cash reserves won’t be nearly as stressed as those who have no cash reserves.

I will admit that I have found myself, at times, in both situations. I had a devastating casualty event occur at a commercial property. Thankfully, at that time, I was sitting on $50,000 in cash which made it a whole lot easier to handle. I’ve also found myself, however, as the broke rehabber trying to squeeze out another $1,000 line of credit from Home Depot to finish a rehab that was already losing money. Let me tell you, having cash reserves is far better.

Some of you may say, “But Jeff, inflation is going to eat away at the purchasing power of that money.” I realize that, but I’m not talking about having large amounts of cash. I’m talking about having cash reserves of maybe 10-15% of your active investment portfolio. This is especially important if you are engaged in the business of private lending. You need to have cash reserves of maybe 10% to back up the outstanding loans in case one of them goes bad.

Does the money have to be sitting in a savings account making little to no interest? No, but you should be able to put the money into a demand account, such as a money market account, and make close to 5% on it. You might want to put that reserve money into something else that can quickly be made liquid. My reserves are not all in cash, but they can be turned into cash in three business days or less. Having those reserves has allowed me to sleep much better at night and be prepared to take advantage of a good opportunity when it shows up.

Let me tell you a story about a man who had cash reserves at the right time that enabled him to seize a good opportunity. In the Old Testament book of Ruth, we read about a mighty man of wealth named Boaz. In the final chapter, we see that Boaz, who had recently sold his harvested barley and wheat, had the cash necessary to buy back a piece of valuable, income-producing real estate. In so doing, he secured a bride for himself, and his future heirs would inherit the land he had bought back for an extended family member. Boaz was able to take advantage of an important opportunity at a critical time because he had the necessary cash on hand.

Cash reserves are a good safety net for handling things when they go wrong, and they will. It’s also a wonderful tool to use when good opportunities must be acted upon quickly.

Your comments and brief questions are appreciated. I read every one and will do my best to briefly respond. If you like this article, please feel free to share it on social media or otherwise and encourage your friends to go to WatsonInvested.com to sign up so they can receive their own emails.

Until next time,

Jeffery S. Watson