Where to invest cap ex reserves?

Question

Jeff G. · Answer

Using credit instead of cash for reserves is an aggressive option that can increase your investment returns, but it increases risk: will credit still be available if/when you need it?  Issuers can cancel credit cards at any time, even if your accounts are in perfectly good standing.  HELOCs have more consumer protections, but they can still be dropped through no fault of your own.  For example, a bank may cut or eliminate your HELOC if the housing market drops and you no longer have as much equity.  Or, more likely, it just won't be renewed when you were counting on it.

Could you still handle capex if your HELOC vanished?  What if that S&P 500 ETF was also worth only 50% of your initial investment?  Would the answer still be yes if you lost your day job?  How about if a number of your tenants all lost jobs and were unable to regularly pay rent?  Perhaps the stress might then start getting to you and lead to an illness & expensive medical treatments that weren't fully covered by insurance.  Maybe all that at once was the last straw for your marriage.

Sure, all of those seemingly unrelated things happening at once might seem far-fetched, but they lined up for many folks in 2008-2009.

In 1984 pyschologists Daniel Kahneman & Amos Tsversky showed how humans tend toward irrational risk-seeking when facing an expected loss -- a loss like holding cash (equivalents) during inflation.  Are you wanting to lever to achieve a greater expected return or because you can't accept that loss?

John Leavelle · Answer

Howdy @Adam Bearup

I maintain my reserves in a credit union CD.  This CD is called a Future Builders CD.  It is very flexible.  You can withdraw up to 50% of the balance every day.  No penalty.  No fee.  It earns more than a regular savings or money market account. But, not as much as a regular CD.

The only problem I have is you cannot transfer money out of it on-line.  I get around that by using my Credit card or HELOC then going by the Credit Union later to transfer funds.

Hope this helps.

Adam Bearup · Answer

@Jeff Gore. Holy shhhhhhhmokes! Point taken. I appreciate the perspective.

Dean Valadez · Answer

Thanks, Paul! I appreciate your help

Paul Azad · Answer

I think if you set up a brokerage account with the same bank that your business checking account for the LLC is at, you can simply move the money from the checking account into the brokerage account and then purchase something. like USFR, which pays 5.4% in T bills with zero risk of loss or BKN which pays 5.7% in tax free Municipal bonds if able to tolerate some risk (this gives me a >9% tax effective rate on my cash). And then whenever you need cash sell those from the brokerage and transfer that portion of money back to the checking account. As long as you don't put any funds into the brokerage account from anywhere else other than the LLC checking account then you should be fine. Both Bank of America and JP Morgan Chase have their own brokerages now in house that can handle that, so you just point and click to move the cash. Don't accept less than about 5.4% from anywhere, anything less is ridiculous.

Dean Valadez · Answer

Hi Adam,

I am new to investing and am wondering this myself. Since it has been 7 years since your original post, I am wondering what you ended up doing?

Or, if others in this thread are still investing their CapEx funds into the same vehicle.

Do investors separate their CapEx from their Reserves? If so, do they both go into interest-bearing vehicles? If the two are lumped together, I assume that lump goes into an interest-bearing vehicle?

Lastly, how is this done? Right now, my properties are owned by my LLC's. There aren't high-interest money market accounts for businesses and most, if not all, high-yield money markets are for personal accounts. Does my LLC pay me and then I put that into the MM account? Do I then pay from my personal back to my LLC when I need to use that money for CapEx or maintenance reasons? (I would be concerned about 'piercing the corporate veil' if I intermingle personal with business, but am not sure if the above example is intermingling or not.)

Adam Bearup · Answer

Howdy @JohnLeavelle

Thanks for your insights. I love the idea of a flexible product like the Future Builders CD to keep your money working while it waits. Bummer it's a bit old fashioned in it's inability to transfer online. Clever use of the HELOC however to streamline the process!

Adam

Michael Boyer · Answer

Good question. Ideally, you could find something liquid (money market) or fixed for a duration until you need it (CD, etc) with a rate approximating inflation but rates (even with talk of some incremental raises coming) still won't yield much.

I think you have a good point about return. If you're reserves aren't getting enough to cover inflation, you are going backwards.

About my best idea is to look at your time frame. Need a new roof in a 3-5 years, you probably want to be pretty liquid (year long CD, Money Market, maybe very short term bond fund etc) for those funds.

On a condo board 15 years ago, I  was once able to get us into some nice CD's a decade ago that laddered with the useful life of components. That was more six figure range reserves and it made a difference.

I may be a bit on the bold side for longer term items.

For the reserves to replace components a decade or two out, I was hoping to get us into some exposure into an index fund (total bond, total stock, SP 500) or something but left the board before I could convince folks. Lots of education needed and even fear of the unknown. I realize now, had we done that, it would have appreciated well, especially on the stock side.

On that theme, if you have very long term designated reserves, I think you are the captain of the ship. And if you have a good notion about historical returns, you can make the call on the assets. I think there could be some work done on this to model ways to put reserve money to work prudently over time.

Best of luck

Where to invest cap ex reserves?

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