The assessment of risk is one thing. Even if you’ve convinced yourself the inherent risk in any particular real estate investment fits into your comfort zone, the analysis isn’t over. It’s not over by a long shot.

Let’s pause here for a reality check. Has it ever really hit you between the eyes why it’s called risk capital? It’s cuz your capital is — at — risk.

All the Purposeful Planning in the world won’t rid you of risk. It can’t. Only Mom, with her gazillions plus her unconditional love, eliminates risk entirely.

This is why we insist on cash reserves, what we’ve for years called Sominex Accounts. (Again, for the under 40 crowd, think Ambien — you know, sleep better at night.) Two clients might be put into the same type property with the same cash requirements to close. But often one will be advised to have bigger or smaller sized cash reserve account than the other.

Why?

Cuz people are different. The late 40’s couple making $122,000 between them while saving $20,000 a year after taxes, might need less than their neighbors who make half that, have four kids, and just want to get their retirement program going any way they can. The two couples aren’t equal when it comes to Murphy’s unscheduled visits. And he will visit you. Sooner or later everyone gets their turn in the barrel.

I’ve lost property before as a direct result of a surprise visit by Uncle Murphy. Based upon that experience, I’ve always remembered O’Toole’s Corollary to Murphy’s Law.

It says simply, Murphy Was An Optimist.

When establishing Sominex Accounts we tend to error on the generous side. Nobody gets upset because they’ve been able to handle an unforeseen four figure expense without breaking a sweat. It’s when you have $11,000 in the bank, and a freak storm requires $9,500 in repairs and a new roof. How do ya think yer sleepin’ that week? So when you think Sominex Account — think a big pile of cash.

Remember — reducing risk isn’t synonymous with removing risk. Cash reserves must be part of any thinking investor’s Purposeful Plan. We believe this so fervently we won’t work with folks who won’t establish them. Won’t — Period.

Just the other day I told a good friend of mine, also an agent for which I have great respect, that he’d have to work with a young first time investor, (and personal friend) himself. I’d met the guy, and liked him a lot. He’s smart as a whip, works like a dog, and earns six figures a year — all while he’s under 30.

Oh, did I forget to mention he’s married with two toddlers?

We refuse to play any part in putting this young man’s future, and/or his kids’ futures, in jeopardy because he’s got more testosterone than is safe. Remember now, I like this kid. He impressed me to death. And I still won’t work with him. His wife and kids and their immediate financial future, not to mention a decade down the road, are far more important to me than if he begins to execute a Purposeful Plan now or in the near future. He makes enough to save serious ‘bank’ over the next couple three years.

Meanwhile, he didn’t risk losing his great credit rating, maybe his own house, or even his marriage. No Sominex Account can ever be enough to pay for that kind of a loss.

Countless times we’ve lowered initial investment plans because of changes in the lives of clients. Life happens to all of us in real time. Cash reserves are like sleeping pills in many respects.

What you may not understand is most of the sound sleep resulting from generous Sominex Accounts?

It’s mine.

This entry was posted on Friday, January 18th, 2008 at 7:04 am and is filed under Cool Info. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.