Most real estate investors I know are liars.
The number one thing that real estate investors lie about is their reserve fund for their rental properties.
Here is a really funny clip from the movie, Liar Liar.
[youtube]http://www.youtube.com/watch?v=wBeiKpAGXzc[/youtube]
A reserve fund is money that is allocated for each property that an investor might own. A reserve fund is often kept in a bank account that has been set up for that particular rental property. These funds are very important as they come into play whenever there may be a vacancy with the property or if there are any repairs or maintenance that are required. These funds are very important, because in the event of a vacancy, as a real estate investor, you will be drawing upon these funds in order to pay your operating expenses on your property, such as your mortgage, property taxes, insurance, and any other fees that may apply to your rental property.
As a general rule of thumb, it is always a smart idea to have some money put away in this reserve fund, so in the event of a vacancy, you are in a strong position to make payments, and you do not have to look around for other sources of funds so that you can make these payments.
Opinions differ as to how much money should be set aside in the reserve fund. Some investors that I know say that they keep 2 months of expenses in their reserve fund. I have heard others say that they keep 3 months of expenses. Another investor said that he keeps 6 months. The highest that I have ever heard is that one investor said that he keeps $10,000 in the bank for each rental property that he owns. In my opinion, that is a little crazy.
I have noticed that investors lie about the amounts in their reserve fund in order to impress potential joint venture partners. This dishonesty is wrong and I do not support it. However, when I take a step back and examine why these investors are lying to their potential joint venture partners, I understand the psychology behind it.
The number one thing that I have noticed that novice investors are concerned about with regards to purchasing rental properties is the inherent worry that the property will go vacant. Generally speaking, people with no experience as a real estate investor worry to no end at the prospect of a rental property going vacant. They feel that once the property goes vacant, they will not have the money to pay the mortgage on their rental property, they will end up going bankrupt, lose their rental property to the bank, and then their life will be over.
Experienced real estate investors know that vacant properties are a part of the real estate investment game. The goal and objective of real estate investors should be to minimize the vacancy period as much as possible, through a pro-active approach. Pro-activity can take on many forms. It often involves advertising for an upcoming vacancy through multiple online channels, through print media, and often times through a property management company.
However, let’s come full circle and take a look at why some real estate investors continue to lie about the amount of money they have in their reserve fund. If they are working with a joint venture partner that is new to real estate investing, as stated above, one of the fears that the potential joint venture partner may have is the fear of a potential vacancy. If the real estate investor is able to address the joint venture partners concern about vacancies, he or she may lie to them and give them an over inflated number as to how much money they keep in their reserve funds for their existing properties. By giving the potential joint venture partner a false, inflated number, the real estate investor is hoping that they will come off as being more competent to the potential joint venture partner. As such, they are hoping that the joint venture partner will agree to invest their funds with them.
Again, I think that if a real estate investor lies to a joint venture partner about this, it is wrong. A real estate investor must be transparent and honest with their joint venture partners. It is this transparency and honesty that builds trust. Trust has to be earned.
As I have embarked upon my real estate investing career, I have dealt with vacancies on a number of properties. I have often had to inject my personal funds into the reserve fund account so that I could continue to make payments on my rental property. For example, I recently had a vacancy on a 3 bedroom 2 bathroom townhouse. The vacancy lasted 3 months, however, I only had one month of expenses available in my reserve fund. As such, I had to draw upon my personal funds in order to make the payments for the other 2 months that the townhouse was vacant.
Some real estate investors might say that this makes me a bad investor, as I do not keep a ‘sufficient’ amount of funds in my reserve fund. Am I am bad investor? I don’t think so. If there is one thing that is for certain, I am honest.
Moving forward, I have learned from my experiences that I am always going to make sure that I keep 3 months of expenses in my reserve fund account. That way, when my next vacancy comes, I will not have to move money from my personal accounts in order to cover the vacancy.
