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

Posted @ 10:32 pm - Filed under Real Estate Investing, Purposeful Planning, Buying Income Property, Sominex Account, Investment Lessons

It’s a perfect time to revisit the concept of cash reserves, which as regular readers know, is called a Sominex Account here. 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, (see podcasts) 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.

This entry was posted on Wednesday, January 30th, 2008 at 10:32 pm and is filed under Real Estate Investing, Purposeful Planning, Buying Income Property, Sominex Account, Investment Lessons. 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.