Cash Reserves for Real Estate: How much? Where?

Question

Hi All-

I'm preparing to buy my second SFH in the next 6 months or so, provided the right deal is there. I really need some help regarding the best way to posture my finances in the meantime so I'm ready to take advantage of a deal when I find one.
I want to be able to fire off cash offers, and, since most sellers won't accept brokerage investment account statements as proof of funds (and because I've gotten burned using stock to buy a house with cash before!), I want to start holding a modest cash reserve in order to buy real estate with, when the time comes.

SFHs in my market generally go between $85k and $125k. My goal is to hold $50,000 as a cash reserve, and rely on a 401(k) loan to cover the rest.

Is this too much to just be "sitting there"?

I'm strung up right now because most of the (non REI) guidance I've found is to only hold 3-6 months of living expenses as a cash reserve. In my case that'd be ~$10,000, not nearly enough to actually using up front on a real estate purchase. Not to mention, I'm not planning on having this as a "rainy day fund", which is how most traditional financial advice will see a cash reserve.

How would you hold this cash?

I've seen conflicting advice regarding putting this money in a high yield savings account vs. a money management account, but I'm leaning towards the savings account because of the higher APY, and I won't be affected by transaction limits or ATM accessibility. Are there any better options for holding cash?

Part of the reason that I'm confused here is that I've competed with investors for higher price point properties (>$200k) and have been outbid by cash offers. Do some individuals really just have $200k cash sitting in an account somewhere waiting to be spent? Or do they have some other highly liquid financial instrument they can use in these situations?

Thanks for any and all insight here. Looking forward to the discussion.

Eric

Erik W. · Answer

@Eric Bette, hi and welcome to BP!

I think the title of your post is going to confuse some people.  "Reserve funds" are typical for repairs, to cover vacancies, and capital expenditures.  Fyi.

What you're talking about are investing funds.  Consider using that more common terminology going forward.

Depending on your goals, I think the ideal amount of cash to hold is enough to steal something for all cash without a bank being involved.  You can always BRRRR it out later and do it again.

I wouldn't store it anywhere volatile like a stock or commodity.  Probably just a local bank money market.  Keep in mind if you are doing 3-4 houses per year, that money isn't going to be invested long enough to make much difference regardless of where you keep it, but you want to protect yourself from a massive downturn.  Back in March, markets dropped 40-50%....would have stunk to not be able to deploy that capital b/c if you sold out of stocks at that point you'd have lost half your purchasing power!

Investing capital needs to be preserved: #1 rule of investing.  50% loss needs a 100% gain to get back to par.  More investors lose it all by trying to be too sophisticated with basic principles like this.

Your return will come from buying good deals over and over again.  Let your money "rest" for a few days or weeks in between in a boring old savings/money market account.  The peace of mind you will have will lead to fewer distractions and better overall investing decisions.

Carl C. · Answer

We bought a $300k property for cash. It was all sitting in savings accounts waiting to be deployed. Didn't feel bad about it one bit. Speed of execution was critical.

Erik W. · Answer

@Scott Jensen, point taken, thank you!

I was reviewing my purchases back in March, and I was buying individual securities that had dropped at least 40%.  Got several at 50% off their high.  My bad for not resetting my filters.  On the plus side....they're all back where they started in Feb and some are doing much better.  (*grins)

Scott Jensen · Answer

@Erik W. Not to split hairs...but the market dropped about 33%, not 40-50%. No need to exaggerate...the real numbers were bad enough to make your point. ;-)

Scott Jensen · Answer

@Eric Bette $50k cash sounds reasonable. I had an investor tell me they get nervous if they're holding less than $100k cash...so yes, some investors hold a lot of cash to be able to move fast. I would just park it in a high yield savings. I like Discover personally, but there are other good ones as well.

With interest rates so low you could look at using your stock accounts as collateral for a line of credit. I am setting one up for a client right now and the rate is between 1.6% and 4% depending on the amount of the line.  That is a way you could reduce the amount of cash you have on hand and maybe avoid that 401(k) loan.  Just be careful lot to go overboard and take the maximum out or a stock market downturn could get your loan called.  Disclosure: I don't know your specific situation so this isn't actual financial advice specific to you.

@Jason Bouck If you're worried about inflation, and some inflation is a reasonable possibility, invest in stocks and real estate and leverage the real estate with the longest term mortgages you can find.  I am not a huge fan of precious metals.

Darius Ogloza · Answer

I have never had a seller turn down brokerage statements from an after tax account as proof of funds. Are you relying on a 401k statement?

Calvin Thomas · Answer

Blue Horseshoe loves Anacott Steel

Jason Bouck · Answer

I am also interested in hearing the answers and conversation regarding this topic. Additionally, I would like to know if there are ways to buy real estate through precious metals (real money) with gold and silver.  As inflation goes up and is/will skyrocket, the price of gold in terms of US dollars will rise exponentially as well IMO. Basically coming to the conclusion that holding US dollars in a savings account is next to absolute useless.

Looking forward to hearing from you all.

Cash Reserves for Real Estate: How much? Where?

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