Cash is King! We have all heard this saying a million times. It’s an expression that is valid but mainly during specific economic periods. Cash is King when you need it. I know, we all need cash all the time. I’m talking about cash from an investor’ perspective. In our current environment, holding cash or leaving cash in a traditional bank account; you are losing money. In any period, the cost of living rises typically at least 1-2% per year or more. Currently, the bank is paying a ½ of 1%. In this period of time, cash is not king. It’s losing value every day!
As Grant Cardone demonstratively explains, “Cash is Trash!” Grant preaches regularly about investing all your cash into real estate. Real Estate is a hard asset you can see and touch. In other words, you have control of the asset’s performance. He also clearly explains cash in real estate in this part of the market cycle is vital. Some may argue about diversification, but that is another topic for another blog. It is clear to me; being invested in well positioned assets is a wiser decision than losing cash value in a bank account.
Inflation is another buzzword being used regularly. What effect does inflation have on cash? High inflation increases the cost of goods and services and ultimately lessens the value of your cash. Cash is also not king during this period. Cash invested in this hard asset during an inflationary period will benefit the real estate investor. Rents will move skyward during this period and ultimately increase the property’s value. This dynamic has been proven over time as we have witnessed changing economic market cycles.
When is cash king! Cash is king when the lending climate becomes less liquid. Banks become extremely conservative and will be extremely finicky with their lending. For example, lending tightens up, the real estate market slows due to the lack of liquidity in the market due to fear of a recession, real estate values typically correct down, notes on properties eventually mature and hopefully there is enough equity to refinance. The property can be operating as planned but the new value changes the amount the bank is willing to lend. At this point, the investor may have to inject cash into the deal to satisfy the new loan to value. Cash is king at this point! Without the ability to invest more cash, the owner may have to sell quickly or potentially lose the property to the bank when they call the note.
What is the “sweet spot” for liquidity to support your investing portfolio in times such as this? The answer may be different based on varying opinions of the current cycle, how conservative or aggressive the investor may be based on their appetite for risk. It’s an art measuring and balancing these dynamics as we do business throughout our journeys.
Cash is certainly king during times lending is scarce. Otherwise, each individual investor must find their comfort level of liquidity at varying points of economic cycles.