Coronavirus caught the entire world off guard and as of today, everyone is feeling the effects of it, especially in multifamily, where most owners are facing the reality that the majority of their tenants may be unable to pay their rents.
What can multifamily investors learn from coronavirus? One of the most important things that we can learn is the importance of having cash reserves.
In times like these having cash reserves is ideal for owners because it gives them the ability to have a financial buffer until coronavirus is under control and people can go back to work.
How Much Cash Reserves Should Owners Have Per Door?
By default, every owner should have cash reserves for each door in their building anyway for maintenance and CAPEX, or other issues that arise during the year. Having money saved is going to help with taking care of those expenses.
When it comes to cash reserves, the goal should be to start saving money early so that you can have at least $1,000 per door in cash reserves. Having this buffer will give you the ability to withstand a month-long vacancy and if a major repair is needed you would have enough money to cover it.
$1,000 per door is on the low side though, ideally, you should have a minimum of $3,000 saved per door because depending on how much you’re renting your property for you should have enough money saved to cover an extended vacancy or a major repair.
How to Build Cash Reserves During Coronavirus
“It was the best of times, and the worst of times” – Charles Dickens
This quote could easily describe the current economic climate because even though the economy is essentially shut down, and many are not working, we are seeing historically low mortgage interest rates that could go even lower.
If any owner doesn’t have much money saved in cash reserves right now, one of the best things that they can do is choose a cash-out to refinance loan for their multifamily property. This will enable them to pull out some or all of the equity from their property and apply that money towards building their cash reserves.
Another way that an owner can build their cash reserves right now is to choose a home equity line of credit (HELOC) for their multifamily property.
Yes, some lenders don’t like doing HELOC’s on investment properties but, there are investor-friendly banks out there and if an investor calls around it’s possible that they can find the right bank who would be willing to approve them for a HELOC.
To qualify for a HELOC for your multifamily investment property you must be able to show a lender the following:
- There must have leases in place at your property.
- Your ownership of the property must be in place for at least 12 months
- You should already have some cash reserves in the bank and an established history of real estate investment.
- When it comes to credit score, it should be no less than 680.
Once approved for a HELOC, the investor could withdraw those funds from the HELOC and put them into their cash reserves.
Tip – If this recession follows the pattern of the 2008 recession, we could likely see the credit market begin to dry up and this means that it may get harder for some investors to get approved for loans so investors should be applying for new loans NOW while the banks are still lending.
The good thing about building cash reserves now is that it will give an owner the ability to be more flexible with their tenants who may be out of options financially until their first unemployment checks or stimulus payments start coming up.
Owners should be willing to work out payment plans with their tenants so that a tenant who is unable to pay their rent for April or May can pay some money towards rent and pay back the balance that they owe their landlord over 12 months.
Your Property Is Only Going to Get Older
Even though you may own a multifamily property that was built within the last 10 years, the reality is that your multifamily property is only going to get older and this is why building your reserves should be a consistent focus for you each month.
Focusing on building healthy cash reserves with each multifamily property that you own will give you flexibility with your property for taking care of the foundation, HVAC and issues with the roof or for surviving vacancies in the future.
Building cash reserves and having the ability to take care of problems with your multifamily property will also help you to have long term tenants who want to stay in your building because they see that you are an owner who cares about the property and not just another “slum lord”.
Once you begin building cash reserves for your multifamily property, you shouldn’t neglect to build your cash reserves.
How much money should you have saved? Many investment “gurus” including Dave Ramsey, recommend having at least 3-6 months in cash reserves saved, you should have personal cash reserves that will enable you to pay all of your bills, living and business expenses for 12 months or longer.
Business owners and investors should have plenty of cash saved for a “rainy day” because this will also enable them to have the opportunity to take advantage of great deals when they arise during times of crisis.
Even Ray Dalio has famously said “cash is trash”, the reality is that cash is still a necessary part of life and it’s a smart decision for investors to shore up their cash reserves so that they can withstand vacancies or a crisis like a coronavirus.
I’ve offered you a variety of ways to get access to cash right now and build your cash reserves. If you do anything while you’re sheltering at home during coronavirus, you should be taking steps to build your cash reserves and “shore up” your financial house.
Nobody knows how much longer the economy will be shut down so it’s a smart decision to use all of the economic tools at your disposal so you can survive and prosper during these challenging times.