Why every property investor needs a cash buffer

Tuesday, 16th May 2017
Categories: Finance, Newsletter

need for cash bufferCash buffers are essential when building a large property portfolio as they provide a safety net for investors. So how much money should you set aside for a cash buffer and when should it be used?

When building a large property portfolio, it’s important to set aside a sum of money that can be used for contingency situations.

Without an adequate cash buffer, you may find yourself in a financial bind if you suddenly need to pay some unexpected bills.

Typically, there are two income buffers that you should keep – a personal income buffer and an investment property buffer.

A personal income buffer is important in the event that you lose your job or need to take an extended period of time off work because of illness or another reason.

The aim of this buffer is to allow you to maintain loan repayments on your home loan and investment loans during the period that your salary is reduced or cut off.

The size of your personal income buffer should depend on your risk profile, stage in life and job security, among other factors, but it’s typically recommended to hold 2-4 months of your current income on hand.

The second type of buffer, the investment property buffer, is useful for repairs and vacancy periods.

The aim of this buffer is to ensure you have enough cash on hand should you need to complete maintenance works on an investment property, such a replacing a hot water system or fixing a leaking roof, or to maintain loan repayments during vacancy periods.

The size of the investment property buffer should vary on the age of the property (the older the property the more maintenance that is generally required), the vacancy rate in the area and likelihood of changes in the market. Typically, it’s best to hold 2-4 months of rental income on hand as an investment property buffer.

By failing to hold adequate cash buffers, investors can easily find themselves under financial pressure should they need to address urgent maintenance works or if their salary is suddenly reduced or cut off.

This can have significant consequences on investors’ property investment plans and goals and could even lead to forced sales.

However, by planning ahead and putting these cash buffers in place, investors can have peace of mind that they can continue to meet their financial obligations should repairs be required or there are disruptions to their income.