Cash Reserves

It all depends on your comfort level in how much debt you would like to handle, and if you can do more with the excess funds you have. Some people are fine with having a high LVR, while others see it as too much of a risk.

In regards to LMI, as it is an IP, LMI is tax deductible over 5 years, can be capitalised onto the loan, and interest charged on the LMI is deductible as well.

Hi Tom

Just to clarify the point on LMI deductibility.

It is actually 5 years or the Term of the loan whichever is the shorter period.

In the case of a 3 year interest only period the premium would deductible over 3 Years and not.

LMI is an opportunity cost and certainly where a client has limited funds or equity i would always look at it as a gearing strategy.

As far as the level of cash reserves are concerned then this will be dependant on the client risk profile and also the uncommitted income position. If the deal is tight on serviceability and a new hot water service would mean that you cant feed the children for a week then you would want to keep some rainy day money up your sleeve.

Cheers

Yours in Finance

Your post asks 2 different questions- how much cash should one put into the deal (10%, 20%).

But you are asking how much cash to have in reserve. This is a different question.

In answer to that- you need to have enough cash in reserve to cover any problems that may arise. Again everyone has their own comfort level. Some people have 6 months rent for example.

If you have no cash reserves you can quickly find yourself in a position where the bank takes your property if things go wrong.

If your tenant stops paying rent for 2 months are you still able to pay the mortgage? This is not a far fetched scenario.

I have a friend that had a very high LVR who lost a lot of her portfolio. She had no cash buffer and had to sell some properties in a hurry.

I like to keep an amount in the bank that is equivalent to 3 months worth of rental roll.  If I was not working to cover my own living expenses, I'd want my cash reserves to be higher.

If I struggle to sleep at night with this kind of cash reserve, my comfort level would dictate that I would need to beef my cash reserves up a bit.

I love offering on property when you have 100% in cash You can really squeeze and perhaps more important act quickly. Nice to have 1M+ cash as the jaw dropping deals tend to be in that price range with resi I have found, however I know buyers who shop at the lower end of the scale <300k and sometimes much less, with patience and network building you can pick up a stunner with this approach, only need 1 every year or so to  make it worthwhile as well.

I assume you have arrived at $10K based on Jacs (?) comment about three months.

While three months may be OK for Jac you do need to consider what is right for you. Typical selling times also come into play.

Let's just assume for a minute that the wheels fall off your life and you need to sell. The market your properties are in may be extremely slow – lets say 180 days. All of a sudden your cash reserves are short by three months.

For me the right amount of reserves is a formula based on your SNAF, monthly costs, selling times + a little bit extra.

PS If your reserves are cash – put them in an offset account.