buffer - How much is eonugh

Evening All, I watched a Nathan Birch youtube clip where he talked about buffers. He claims $5K per IP is enough. Just wondering how much others have i.e a percentage or do you think $5K is ok?
 
I don't think it's enough - but it's a personal decision too.

Personally - I don't allocate a certain amount to each IP. I just have an overall amount that I leave in the offset and don't allow it to dip beyond a minimum amount.
 
I don't think its enough. Depends on how you feel about risk and the size of your portfolio.

Yes, as well as how aggressive you are with your financial endeavors in general.
But 5k buffer ?
Not enough to be able to make future fearless decisions, it will hold you back.
 
12 months of loan repayments/living expenses, say 50K. This wil give plenty of time to sell down if need be and recover from a catastophic event. Nothing worse than being an unemployed/sick/desperate vendor.
 
I reckon it all depends on what you classify your buffer is used for. My buffer is, **** has hit the fan, vacancies, rising interest, no job etc. It's unlikely this would all happen at once, possible but unlikely.

Where as some people might use their buffer for new kitchen etc or some other reno type thing that might be urgent and therefore need to increase it. For these type of things I'd prefer to use equity or some other finance.

I've classified my highest risk and most likely event, which would cause me serious problems, to be interest rate rises. So I've now set my buffer as an amount I'd need to sustain a 9% interest rate for 2 years.

I just checked and This works out to be about 7.5k per property of designated buffer money. However, I have operated with much less than that while building the portfolio.
 
Thanks guys some great posts much appreciated. Can I then ask another question. I have an IP (only one at the moment) that is generating fantastic returns due to the low interest rates etc.... I was wondering how this will impact me in terms of tax. Should I be purchasing a negatively geared IP to offset this?
 
Thanks guys some great posts much appreciated. Can I then ask another question. I have an IP (only one at the moment) that is generating fantastic returns due to the low interest rates etc.... I was wondering how this will impact me in terms of tax. Should I be purchasing a negatively geared IP to offset this?

You don't like making money ;)
 
Thanks guys some great posts much appreciated. Can I then ask another question. I have an IP (only one at the moment) that is generating fantastic returns due to the low interest rates etc.... I was wondering how this will impact me in terms of tax. Should I be purchasing a negatively geared IP to offset this?

This sort of question is common. But you are coming from it at the wrong angle. You should only be considering whether to purchase another property to make money or not. This may increase deductions, but this is only incidental and not the main point of investing.
 
12 months of loan repayments/living expenses, say 50K. This wil give plenty of time to sell down if need be and recover from a catastophic event. Nothing worse than being an unemployed/sick/desperate vendor.

For the OP this is roughly my view, for the average wage earner in low risk profession not so much 12 months of wages, otherwise many would never get started. Its more about basic risk management for me that means being able to make mortgage repayments even if you have some changes in employment. 5% of debt which currently equates to 12 months of interest payments that can be made from savings not wages if (for example) you lost your job and needed to just survive for a while and had a vacant property at the same time. Worst case combo but that is what buffers are for. So as a general rule 5% of debt. If you are in a riskier job or doing renos full time etc then you definitely want a good number of months of wages stacked away too.
 
Evening All, I watched a Nathan Birch youtube clip where he talked about buffers. He claims $5K per IP is enough. Just wondering how much others have i.e a percentage or do you think $5K is ok?

Other posters have given you a fairly good idea, however if you want to take an analytic approach here's the gist of it.

Basically there are 2 categories of risks: known unknowns (things that you have identified as risks e.g. job loss, interest rate increase, tenant default...) and unknown unknowns (things you haven't thought about that come out of the blue).

For the first category you can use the usual formula: contingency reserve = risk $ amount x probability.

- For example if you have 25% probability of losing a $100K job and you expect it would take you half a year to find a comparable job then your reserve for this particular event would be: 100K x 0.5 year x 25% probability = 12.5K.
- If you have $1500K in loan on which you see a 80% chance for interest rate to rise by 2% and that it would take you 2 years to resolve the issue (e.g. by selling, refinancing, getting extra income etc) the applicable reserve would be: 1500K x 2% x 2 years x 80% probability = 48K.
- For tenant risk, if each default costs $8K average, you have 5 IPs and the probability of default is 10% (1 default for every 10 tenancies), your reserve would be: 8K x 5 x 10% = 4K.
- Do the same for every identified risk.
- Total them up to arrive at the total contingency reserve that you need.

The second risk category (unknown unknowns) is what's called management reserve in project management. It's a number usually plucked out of thin air depending on how comfortable you are with the project. It could be as low as 1-2% of total commitments if you're really experienced and have all your plans lined up, or as high as 10% if you're really green and unsure about how circumstances may turn.

In pure residential property investment (not talking about development here) because you can use insurance to reduce many of these risks, you would not normally need more than 1-2% for a larger portfolio and 3-5% for a smaller one. So if your total portfolio is $2000K a comfortable reserve could be something like 40K.

Finally, total buffer = total contingency reserve + management reserve.

While the above calculation looks scientific, it's fairly subjective in the way you determine probability. It also varies a lot from person to person because everyone's circumstances are different. And your risk acceptance profile will play a role too. I used to be a higher risk investor when younger but am now playing it safe.

I'd be very disappointed if a professional advises every of their clients to use the same standard buffer.
 
Depends what properties you buy. 5k is pretty low.

I have 1m buffer+ across 9 properties and this gives me flexibility to for example JV with someone on a really good deal suddenly or swoop on HK shares suddenly which I have done recently.

5k per property is quite reckless and only works if you have a healthy body and prices keep rising. What if you lose your job?
 
12 months of loan repayments/living expenses, say 50K. This wil give plenty of time to sell down if need be and recover from a catastophic event. Nothing worse than being an unemployed/sick/desperate vendor.

Twelve months might be a bit extreme, but the standard advice seems to be to have six months living expenses in cash.
 
If you have one property, then $5k isn't enough. However, if you have 100 properties, I would feel comfortable with $5k/IP.
 
If all your properties are cashflow positive (which Nathan's properties usually are) then 5k might be enough to cover any gap between change over in tenants

If your properties are barely neutral or negative I would err on the conservative and allow more of a buffer
 
If all your properties are cashflow positive (which Nathan's properties usually are) then 5k might be enough to cover any gap between change over in tenants

If your properties are barely neutral or negative I would err on the conservative and allow more of a buffer

Still quite reckless. My portfolio would be much more lower risk and higher cashflow and lower LVR than his I'm guessing and I'd freak out at the idea of having only 45k cash in my account.
 
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