The Importance of Cash Reserves

Cash Reserves Means Never Being Out of Options

Maintaining cash reserves is a critical component of a real estate investor’s strategy. In addition to the funds used for your down payment and closing costs, you want to feel confident that you have enough cash reserved to account for the unforeseen hurdles that arise during the rehab/resale processes, and beyond.

Having liquid cash on hand means no matter what the market throws at you, you can weather the storm, play the strategy you want, and ultimately benefit. When inflation is high, for instance, you don’t want to be forced to sell before prices go up simply because you’re cash strapped. Equally, cash could save your return potential with an over-budget investment property—you never want to have to abandon your project.

According to Business Insider, Real Estate small businesses keeps the largest median cash buffer, while half of all businesses can cover themselves for less than a month—yikes!

You can think of cash reserves in two categories: Cash Equity and Liquidity Reserves and Contingency.

Cash Equity

Cash Equity is the total cost of completing the investment (including rehab costs, interest expense, etc.), minus the loan amount. A portion of the Cash Equity is invested at closing, with the remainder invested after closing. You need to be clear where that money is coming from.

Liquidity Reserves

Liquidity Reserves & Contingency represent the additional cushion you want to have available to you to navigate unexpected situations. This is not cash that goes into the investment; it is liquid funds (cash, stock portfolio, etc) that could be available if needed.

If you work with a lot of debt (as flippers often do), it’s important to keep a larger liquidity reserve to meet your financial obligations. Experts usually recommend keeping enough liquid assets to cover 3-6 months of operating expenses. This ensures you can cover your bills and other short-term needs even if your revenue dries up, or you face unexpected delays. Run stress tests to see how your own business would fare in worse case scenarios. This can help you determine if you have enough liquidity reserves.

One thing about Backflip is that our loan experts will always offer you advice that has your best interests at heart, when applying for a loan. Try us!