7 minute read
Landlord chat: How much cash buffer do you need?
We talk to a RoundTable worth of investors to get a feel for how much emergency cash on hand helps them sleep at night
A war chest, contingency fund, cash buffer - whatever you call it, it can serve as that protection to your business to see yourself through those sticky situations which inevitably crop up. Be it a major roof leak, burst pipe or three boilers dying in two weeks.
But how much cash buffer do you need to feel at ease? Or is holding tens of thousands for a rainy day just poor asset allocation? Let’s hear from a few investors to see what others are doing and what we might learn.
LEE SCOTT
Lee, who we’ll remember from the article on predicting maintenance costs says:
“In the early days, I’d always make sure I had a few month’s rent worth of cover and target around £10,000 in the cash pot. As time goes on and businesses mature (referring to his other businesses as well as the property business) that’s changed.
Now, I let the funds build up until I’ve got enough money for another deposit. That could be £35k or if the right deal comes along I’ll wipe that down. I’ve got other revenue streams which means I’m not really scared about wiping that account down. This is just how any business goes, your approach and risk change over time.
There’s also something to be said about overcoming the urge to spend for the sake of spending. I’m currently sitting on well over £100k from an accumulation of rent due to the lack of deals available. The money just sits in an easy-access account earning 3.7%. As much as that return in property seems extremely low, The last time I was in this position I picked up a great deal requiring 14-day completion. £84,000 purchase, £14,000 refurb, £4,000 fees. GDV £155,000, Pre-tax profit of £47,000 in just 8 weeks.”
JULIAN PLETTS
“I’d love to say I have a hard and fast rule about cash buffers and that I keep a certain percentage for each property in reserve but, to be honest, I just try to maintain between £5-£10K in my account. This nice round figure helps me feel comfortable and then I know that I can cover most eventualities. Plus, Wes’ words, delivered as part of the RoundTable Mastermind Group, have stuck with me (paraphrasing, sorry Wes)money in your account does nothing for you, so you need to put those little soldiers to work. Instead, he suggested ensuring you know where you could get credit or funds in a pinch. When it comes to this, I have a stock portfolio in an ISA that I can tap into if really needed, credit cards and an on-the-ball broker who could help me release equity. That all helps me sleep at night. I do, however, factor 12% in costs per annum for maintenance when deal stacking after this eye-opening piece Alex previously wrote on the subject.”
WES DE LEUR
“As a cash buffer we always put aside 10% of gross rent. This has always been enough to cover maintenance issues. We also have a very healthy credit limit should we need access to the extra resource. At the end of the year the surplus funds (if there are any) will be reinvested the following year. With the current economic climate, I would strongly recommend building additional credit lines as you never know when you will need this as an option.”
LIZ LEIGH
“I enjoy managing my properties even though I never contemplated doing so in the beginning. I like to have a cash buffer of £2,000 per property. Even I couldn’t be so unlucky to have all five boilers go at once…. Could I?”
CAMERON SCOTT
“On the general maintenance side of things, I factor in a 10% contingency on the income for all of my properties, so if I have £1,200 rent coming in, I would set aside £120 to cover any repairs or maintenance that come up and that is automatically factored into my costs each month. Most months I don’t need the full amount, but for unforeseen circumstances and to be conservative with my number, it’s there.
I also think it makes sense to keep aside a rainy day fund for any major expenses like boilers, roofs, tenants leaving, etc. Of course, it’s unlikely that everything will go wrong in one week or month so based on the size of my portfolio, I keep aside enough to cover a couple of major issues if they occurred at once. I would never want to be in a position where I didn’t have enough funds to replace a couple of boilers at short notice or handle a couple of properties having a void - for the current size of my portfolio that means keeping at least £10k aside.”
And so there we have it, a few opinions from a few people. What works for you will vary, depending on your portfolio, your outside-of-property cash flow and just how willing you are to empty your account should the right deal come across your desk. If you’re taking on properties and renovating them fully, the chance of large maintenance bills is much lower. If you’re sitting on assets that are due a new boiler and have questionable roofs, you obviously need to take that into account. The reality is, there is no set amount you need, and there’s no magic number or formula but this should give you some context as to what others are doing that are playing the same game of real-life monopoly as you.
