Exit Strategy?
I was speaking to a finnacial planner about real estate investing and he said that I need to have a plan for what I'd do in a worst case scenario (e.g., I lose my job, the housing market goes south, and I can't find renters). He said I should have a year's salary saved to guard against such an eventuality - preferably in cash rather than my 401(k).
While his statement makes sense, it also strikes me that such a level of caution would leave one to never do anything. I'd appreciate information on what types of buffers or exit strategies others had in place before investing for the first time.
II agree with your financial planner in that you should definitely have some money sitting around for a rainy day. But where it gets debatable, is on the point of exactly how much. In my opinion, a year's worth is quite a bit. I tend to favor something around 6 months. And even then, saying that it has to be in cash certainly doesn't mean that it has to be hidden in a jar in your attic. You can put your money into a money market account, which will earn something in the area of 2-3%. Or you could invest in bonds in stages. This way every few months a portion of your investment comes due and is available to you as cash to spend or reinvest. Now of course the interest you’ll see is peanuts compared to what you could earn in real estate. But this money isn't there to really generate a lot of income. It's there more for peace of mind. I have a feeling your financial advisor is not very comfortable with the idea of real estate investing, and is very conservative by their very nature. That's fine. The important thing is that you're comfortable with investing in real estate. And as for the conservativism, that's exactly what you want from a financial advisor anyway.