THE SLEEP-AT-NIGHT FUND
Today we’re reviving one of our most popular posts.
What keeps real estate investors awake at night?
- Tenant issues
- Bills
- Market Fluctuations, Economic drama, and unexpected expenses
Tenant issues are best addressed with great property management and choosing your properties wisely. Aka: tenant profile matters. This is a huge topic, and not the focus for today.
Regular bills, property management fees and vacancy allowances are best addressed by setting your property up with good cashflow to handle the regular issues that arise. Sounds simple, but most definitely not so much! Cashflow is hard to come by these days. Meanwhile, the cost of everything is skyrocketing like we haven’t seen since the 1980’s!
And what about the wild cards? Those elements that affect your property—but you have far less (if any) control over. Markets will go up and down, that’s all part of the real estate cycle; in other words, property appreciation is never a guarantee. Also, these days economic drama follows political drama very closely. Interest rates, taxes, and even tenant dispute mediators can all impact our bottom lines. As one investor, you or I can’t possibly be expected to have control over those issues. In addition, unexpected expenses can come up with your property; for example, weather-related damage that your insurance company decides to decline.
But wait—didn’t you invest in real estate for your financial freedom?
One of the best ways to mitigate the rising bills and “wild-cards” is to have a reserve fund, also known as a “sleep-at-night” fund. And yes, it is absolutely best to set it up when you acquire the property! Some people also suggest leaving the first year’s positive cashflow in your bank account to top-up your reserve fund; personally, we love this idea. And some people leave all cashflow with the property until it is sold. Why? Because as the property ages, more things need replacing, and often bigger ticket items: roof, furnace, appliances, ….
So, how much? Every real estate investor is about the numbers, right?! Your bare minimum should be 3 months of expenses: mortgage, taxes, insurance, utilities (even if your tenants pay them, consider the worst-case scenario where the utility bills come back to you). These days, we are hearing more and more people who have 6 months of expenses sitting in their reserve fund. Do you have personal cash reserves that you could draw on if absolutely necessary? Part of your choice is about how much to leave in your “mini-business”=your property, versus how much to leave in your personal liquid assets. There is no one right solution for every investor.
If you’re doing this for your financial freedom, your reserve fund should be that buffer for the unexpected. Most of our investor colleagues are all creating property Proforma’s with a reserve fund. That money isn’t “wasted;” it’s sitting at the ready, and allowing you a good night’s sleep!
