Does it make any financial sense to save money at 1% (bank interest) when you are trying to pay-down/ pay-off other short term debt (CC, Helocs, etc.) that is costing you more than 5% interest ?

WMH,

Actually, the reverse is true. BECAUSE you are a "burn the candle at both ends and buy with CC" person, you need that emergency fund more than anyone.

Sorry, but the above people are right here, Roy. You should have a MINIMUM of a 3 month emergency fund set aside first. THEN consider your other candle-burning activities.

Again, this "rule of thumb" applies the MOST to you. It is not some "ultra conservative" idea. It's the minimum.

- John...

John (MI)

I have multiple free and clear rental houses. Average retail (MLS) re-sell price is about $40K. If I needed emergency cash, I could sell a rental house and at fire sale pricing, I would net about $15K in less than 30 days.

($15K is what another cheapskate investor would offer).

But is $15k enough? What are your monthly expenses?

Roy, I think an emergency fund is to help you from having to firesale your house.

I've never been a saver or one to leave money sitting in a bank. I do hold gold and silver.

I've always been more or a deal maker and a creative bill payer. That's just where I'm strong personally, saving money, not so much.

For us, we use personal $ from the day job to buy the next house, and we keep biz money separate, to support the subsequent renovations. So one account is all save-save-save, and the other account is all scrape-scrape-scrape.

WMH,

"Assuming something absolutely catastrophic happened"

How about having cancer and then having to pay-off hospital bills that your Blue Cross insurance would not cover? My out-of pocket hospital/doctor bills (since November 2016) are now approaching $15,000. If I did not have insurance, my cancer invoice would be well over $150K.

All I can say is,...keep paying those monthly health insurance premiums even if they seem expensive.

As usual, this post has drifted way off course.

Your personal finances and the finances of your business are separate, although you may be co mingling the funds.

Your business needs to maintain adequate cash to pay its ongoing expenses. Roy needs to do the same for his expenses.

Roy: You think this thread has drifted off course, but it really hasn't.

Several people answered your question directly: Yes, it DOES make sense to put some cash in a low-interest account when you have higher percentage rate loans to pay off -- because you need an emergency fund first. THEN you pay off those debts AFTER.

That was the answer given by several people. Then, instead of taking that advice from many experienced people that you asked for -- you started arguing about why you didn't need that emergency fund.

Everything since then has been trying to explain to you why we think you still need that fund.

It isn't off course at all. It's just apparently not the answer you wanted to hear. :)

- John...

Roy, my friend. You know me...self-proclaimed Dave Ramsey's biggest fan on this board.

Dave says everyone should have a minimum of 3-6 months of household living expenses set aside in liquid form where it can be accessed penalty free (i.e. don't cash out your 401K prematurely). I do this. Business owners/ land lords should have an additional minimum of 3 month's operating expenses and debt service (if applicable) set aside, plus CapEx reserves that accumulate over time because stuff is wearing out every day.

Why so much?

If I went into a coma or had a serious medical emergency (wait, that just happened!) and could not do one thing to operate my rentals, someone has to step in and take control. Ideally, that someone is as smart as me and can smoothly transition in, but the reality is there will be a time of learning the ropes, even if it's just getting a handle on what rents are due and when, who has a lease ending, etc. 3-6 months of operating expenses is a fairly standard time frame across many industries, and since you have quite a few paid off homes I think you'd be good to go on the low end of that range (3 months). I'm still working on debt payoffs, so I keep closer to 4-5 months.

As my mentor says, "Emergency funds are insurance. Insurance COSTS money in terms of lost opportunity. But it saves you from having to sell/liquidate assets at inopportune times." Yes, you could fire sale a house. So could I. But why? What's the plan for that money if not to sit in a bank? Where will I earn a return large enough to justify potentially having to take a $10,000 - $25,000 loss on a house?

So, as others have said, my method is always to have personal and land lord operating reserves at a minimum of 3 months each...make sure to have my CapEx account well-funded and always growing...then I can start using excess cash to clear off debt/invest in other deals.

That's what I do and so that's the only way I can recommend other folks do it. To say otherwise would be hypocritical of me.

To add a few other considerations:

Yes, regarding health insurance. Never be without it. Unpaid medical bills are the No. 1 cause of bankruptcy per articles in USA Today and Fortune magazine.

Disability insurance is also important. Ideally, your emergency fund should cover short term disability, but if it goes beyond 3 months you need a long-term policy. 2 years is common. See if your local REIA offers anything, or perhaps other associations you may be able to get membership in for a reasonable cost.

I don't think this is being ultra conservative. It's common sense that is widely recognized in financial planning. Too many Americans tread on the edge of disaster where one blink pushes them over. I've met a man who used to earn a 6-figure salary who we broke in 14 months when his income dropped due to health issues and he couldn't pay his bills. Talk about fire sale...a $2 million net worth went down to less than $50K by the time he fully recovered. 2 decades or work lost in less than 1 1/2 years. Mostly due to lack of planning. Penalties, late fees, legal fees, all rack up quickly.

Roy I wanted to ask you about your hospital bills, thanks for filling us in on that.

WMH,

Your point and Sid's is well taken. I agree with you all and yes I need to build a larger emergency fund, which is something I was planning on doing after my short term debts were paid off. I have used Helocs in place of having a ton of cash sitting in low interest bearing bank account. There is nothing wrong with this as long as I aggressively pay down the principal each month (this requires discipline). When the balance is zero, I usually go looking for another house to buy. And I have located that house, but that is another post.

Now, if something catastrophic happened (tornado?) and I lost my rental house income, I would be in deep sh*t for awhile. (I do have insurance on the houses). Now, it would nice if I had a spouse with a 6 figure income to bail me out, but that is not the case here. I survive on rental income only. All house purchases, rehab, debt payments, and my personal living expenses are all paid via rental income. I may borrow money on a Heloc to pay cash for a house,...but rental income is what pays the balance off, usually within 12 months. Now, if I start buying in Class B neighborhoods, the pay-off could take much longer, maybe 3-5 years. Not sure I want to go there.

Does anyone else here use Helocs' to buy houses with?

I agree with the others. Try to have at least 3-6 months liquid and then pay down debt. Alternatively, have access to a line that you can drawn down on. Lines sometimes aren't renewed, so just having straight up cash is better.

MI has loose rules on where and how you deposit the SDs. And you have 30 days to return the deposit upon vacating, more than enough in normal circumstances to get a new tenant and SD.

My strategy has changed as I age. Roy, you and I are about the same age. When I was younger, I took bigger risks. If I "lost it all", "all" was not very much. Starting over would not have been a big deal. "Losing it all" right now would be a big deal, so I take fewer risks.

I started out using HELOCs, 401k loans, and credit cards to buy and renovate houses.

Now I only buy for cash. I'm not debt free, but I could be if I wanted. I WILL be debt free in about a year.

I still keep 6-12 months "cash" in reserves. Part of that "cash" may be a credit line; it is typically real cash. I pay off ccs religiously every month. I bet I have paid less than $200 cc interest in my life, and I regularly charge over $5k per month.

As I age, I require fewer "things" to make me happy. I value security more. Therefore, I live conservatively and plan ahead for emergencies.

Roy: To answer your last question... Yes, I have purchased a rental using a HELOC (on my own personal residence). However, I did that only AFTER having savings for an emergency fund.

That way, if something went wrong, I'd still have cash to fall back on without having to worry about the HELOC being pulled or anything. I think this is a better plan than just using up the savings and hoping the HELOC works out in case of emergency later.

- John...

This whole real estate gig is about bits and pieces of information that's fits your life best. That's the beauty of it. Right or wrong, it's yours.

Some things work, some things don't. I think we all here know that.

I don't have huge reserves. Sorry.

I do however, fix every issue that I can see coming whenever I can. I also insure to the MAX.

Also, I try to always have a flip in the process of being

sold as well. That brings in money. I don't keepnit around for long, I put it into another project.

Steve, this is the REAL Roy! No doubt in my mind. He and I are pals. We talked a lot at the convention in St. Louis. His style of broaching a topic is a bit unique, but I enjoy it because it makes me think.

Back to Roy. As you can see, opinions vary, but that's why we're here. Personal finance is called that for a reason: it's personal. Some feel okay with using credit cards & HELOCs. Okay, fine. I only get irritated when they refuse to acknowledge there is RISK involved with doing that. Look back at John...[MI]'s response: he makes a good point about the risk of HELOCs being pulled. Remember 2008-2009 when lending tightened up? Lots of LLs and businesses that depended on revolving credit to fix roof or make payroll due to lazy A/R policies and lax account collection went belly up. It's a real risk. Some folks are okay rolling the dice. As for me... I'm like gevans now where I play it safe compared to may. I'm OK with not making 5-7% on my money that sits in a boring old money market account. It's my cushion; my insurance; and like insurance it COSTS me to leave it there. Meh, I sleep well at night. Maybe folks who play with credit also sleep well at night...for now. We will see what the shake out reveals with the next crisis.

I'm not saying folks who use credit will all go belly up. But the folks with 3-6 months of cash reserves and low/no-debt are unarguably in a better position to weather the storm when (not if) it comes. Trouble is, no one knows when.... So my thought mirror the Boy Scout motto, "Be Prepared!"

When in doubt go back to Dave Ramsey and work the basic steps as they apply.

1. Save a minimal emergency fund of $1,000. (For a LL I say $10,000)

2. Pay off debt smallest to largest. (An exception might be a high interest debt that wouldn't take long to pay off.)

3. Save 3-6 month expenses (Even before I was able to retire I tried to keep a year's expenses. I still think it is a good idea.)

4. Start adding to retirement and investments.

Thanks Sid for verifying my true identity on this post. Yes,it is me but I will admit that after going through the brutal cancer treatments (I had a near death experience too), my views on life and financial matters has changed somewhat.

For thing, I don't dwell on the "what ifs" anymore. What if I lose my income, what if I get sued, what if I have a vacancy, what if some tenant trashes my house, what if a tenant does not pay rent..blah, blah, blah.

I am learning to live my life for today and not so much for tomorrow,...because tomorrow does not come any guarantees.

The reason we do business is to HAVE profit for a cash reserve.

It's Business 101. Any business without it is heading for disaster.

You are beyond the initial , risky, "give it all I got" start up phase. Make your biz profitable and set some cash aside to cover the problems which WILL arise because they always do.

Fire sale? Only few years ago I could not GIVE AWAY houses because the other LLs were broke and renters were broke, not paying. The people with CASH RESERVES were able to snatch up these give away houses.

The banks stopped making any investor loans.

I heard Ramsey explain how your Emergency Fund is worth 18% a year. If you rely on a line of credit to cover emergencies, you'll pay dearly for it (18% at the time) or 24% on a credit card.

Sooo...having the cash available when needed is worth 18%.

LOC: Cannot rely on it being there. I used mine to live on during the recession. The bank was in the same recession so they called my loan and cancelled the LOC. We were current on it and all bills - they were being protective.

I coordinate the Ramsey program for our church. I cannot count the number of times folks say they finally got their emergency fund established then a common emergency hit (they are ALWAYS hitting!). Then they explain the peace of being able to easily handle that emergency and keep on with their lives, thru an emergency which would have previously debilitated them.

A responsible driver has a spare tire.

A responsible boater has a life jacket.

A responsible investor has a cash reserve.

hmmm...if you had a wife she'd be all over a reserve!

...

as a buyer, when I have cash in the bank I am a better negotiator and get better terms. There is no rush and I can walk away. Sellers sense that. It's a confidence because I KNOW I don't NEED this deal..

Also, when you have money in the bank somehow people sniff that out almost like a good cologne. They come to ME.

When you have CASH there will be no shortage of available deals.

Glad you're doing better and up for a great discussion!

#TheRealRoy

BRAD

Brad20K,

Thanks for those kind words of wisdom which only you can offer. If the truth needs to be told, I do have a small emergency fund (IRA account) but it will cost me a hefty tax penalty to access it. In addition, I have a small business savings account, which is very liquid, but I only keep enough cash there to buy a new roof or HVAC system when the need arises. In June, I had to buy 2 new roofs and that almost drained that account dry.

From reading your reply, I can now understand how having a cash reserve is worth 18%,...it is not apparent on the surface but when I really think it about, it makes perfect sense.

Brad, that really is a great way to put it. Cash reserve means NOT having to borrow at 18%.

Roy, we had to replace the equivalent of 9 roofs after Hurricane Matthew last year (four connected townhouses, 4 studios and an up/down duplex.) Since it was a "named" storm, deductibles are doubled so it was $$$$$$ out of pocket for us. Until repairs were completed we only received the depreciated cash value which was NOTHING. And the final reimbursement amounted to about half the actual cost.

On the four studios, the deductible was more than the actual repairs, so we didn't even claim them, just sucked it up and paid out of pocket.

Also about $8500 in yard repairs here: a big sinkhole opened up in our front yard, about 15 feet from the house at most. You can't insure dirt so that was all on us.

WMH,

My two new roofs were not covered by the insurance at all,...they were just worn-out, leaking badly, and tenants complaining. I don't mind borrowing on a B-LOC since my interest rate is 5%,..not 18%. My business LOC is not secured by anything other than my good name and high FICO score,..can't beat that.

Hi Roy,

I too am glad to hear you are doing better health wise. I think there comes a time where we all have experiences that shift our perspective...the question is, for better or for worse?

I know tomorrow is not guaranteed. The next minute is not guaranteed. But on "average"....you and I will be here at least another 20 years. So that's why I subscribe to the "Spend some, Save some, GIVE some" philosophy of finance. We can't be like the little old lady who never saves for retirement because she wants to "enjoy life now" then she ends up on Social Security $761 a month payment and food stamps. Well...we can choose that...but I digress.

Brad's wisdom reminds us why emergency funds are a must. We must be prepared to lose a little interest (and yes, it is insulting the rates they pay these days on savings/money market and CDs) to avoid fire selling a house and losing $10K. I too remember when LOCs were closed down post 2008-2009 meltdown. Even the best borrowers who were current on everything saw their available lines cut by 50% or more.

Roy, I am still 'positive-thinking' you.

Because you went thru so much--just think, if some one you loved needed an immediate operation--like tomorrow, could you do that? Selling a house in 30 days means they are dead.

If you had a fire, and your roof was gone with a big storm coming, could you scrounge enough money to get the right type of roof covering in place, in time, before the water damage FURTHER ruined your home? Emergency funds are for immediate needs, and to limit worse extremes.

How about a sun flare or a nuke knocks out all satellites, all electronics, including bank operations? Do you have any real cash on hand?

At Y2K when people were saying banking computers would lock up at the roll over I had $4k cash in hand in the house, and several gas cans/car fuel--because I still had 2 kids at home who needed food and transport. And again in Dec 2012, I wasn't taking any chances of some end of cycle changes. I had food, extra water, and cash on hand in small denominations.

Sid,

Thanks for your input here. I do appreciate it. However, I really wish you and I (and a few others) were now sitting in a hotel bar where I could be more candid with you all. There is a lot of information that I am withholding here since this is a public forum,..I am sure you can understand.

Hi Roy, missed you at Cleveland.

I went on an aggressive debt reduction plan, when I saw what 50 mortgages was costing me every month. It felt like I was an employee of the banks. I decided to change all that by aggressively paying down mortgages, selling some properties and using the proceeds to pay off other mortgages, and now am down to just a few mortgages.

Debt reduction should be an aim of all LLs. I would also think that it is an area where most LLs don't do enough to know what gets paid off when. I have created a pay off chain so that at least a different property will get paid off every year.

If things ever get tough, will a bank allow me to do a cash out refi for only 70% instead of 75%? Sure.......and if you have one paid off every year, you have created a ladder. Move over, that cash out refi money is tax free income.

Yes a cash out refi is tax free MIF (money in fist) but the borrower will pay interest on that money for the next 30? years of the mortgage.

A few years back the banks would loan out more money than people needed so they would use it to buy a car. They kept the car 4-5 years but continue paying on that money for 25 more years. Now they need a new loan to replace their car WHILE still paying for the first one. Smart move by the banks!

I don't know of any banks in my area that will even tlak about a cash out, at purchase time or refi.

Interesting observation: we're all discussing tricks based on banks and the govt to grow our businesses when cash is simple and always works.

BRAD

BRAD

Not growing any more is also an option.

If I would sell one more place than I buy any given year, I will get rid of my last tenant when I turn age 143.

I will always buy if the deal is good enough - I love the hunt.......

My local bank is trying to push on me......and I simply don't want it. I can't recall who suggested it, but I created a paper chain where every link of the chain is $10,000 in loans. I am not sure who suggested it, but I owe them a steak

David Krulac,

During the Cleveland convention, I was under strict doctor's orders not to leave town. I am fine now and will try to make the next convention. I want to buy/read your book,...is it still available at Amazon?

Your reply here has created another financial question (leverage) for me. On Monday, I will make another post based on your decision to aggressively pay down debt.