BiggerPockets

I've been dividing my monthly rental income into 3 buckets.

Bucket 1 goes into repairs for the property
Bucket 2 goes into the mortgage payment
Bucket 3 goes into future investment savings (MM acct due to higher interest %)

I bring this up because it's frustrating. There has to be a more efficient way to responsibly divvy up my monthly rental income.

What is your strategy with your monthly income?

Sounds like you have a solid plan in place with your 3 buckets. Most instead of saving for the next investment go out and buy a doodad or two. You do not have a doodad bucket so that puts you ahead of the game!
After you have enough passive income in place then you can get into buying yourself doodads, if you desire any at that time! What exactly do you feel is missing from your 3 bucket plan??

Very nice topic Annelise. I have no monthly rental income I will soon and this discussion is helping me plan more. Thanks

I use a budget to allocate my current and future expenses. This also keeps me on my toes when some costs unexpectedly rise.

I put future costs into a separate savings to insure that they are not used for day to day expenses.

When i run financials I am then able to compare income and expenses to my current year budget.

If you like the bucket approach, here's another way to approach it, with 4 buckets:

1. Immediate Expenses: These are your monthly expenses, such as mortgage, utilities, property management, taxes, insurance, etc. This bucket should be immediately and always be funded with 2 months worth of estimated expenses (refill each month with what was actually spent to ensure you always have 2 months in there).

2. Short-Term Expenses: This is your maintenance budget. Set aside funds in this bucket every month until you have at least 1 month of gross rent set aside. This should suffice to cover short-term maintenance if the property is in good shape; if the property is in rough shape, set aside 2-3 months worth of gross rents in this bucket. Every time you eat into this bucket, refill to the 1 month (or 2-3 month) mark.

3. Long-Term Expenses: These are your capital expenses. In general, I think of capital costs as Roof, HVAC, and "Surprise". On a typical one of my houses, I will spend about $4000 every 20 years on a new roof, $3000 every 20 years on new HVAC and about $5000 every 20 years on Surprises (Plumbing, Electrical, Termites, etc). That's $12K I need to save every 20 years, or about $600/year or about $50/month. So, I would take $50/month and put it in this bucket. If your roof or HVAC is closer to end-of-life than 20 years right now, save more, as you'll hit the replacement time sooner. Figure out your estimated capital costs, and save every single month the pro-rated amount into this bucket for as long as you own the property.

4. Emergency Funds: This is for emergencies. For example, if you go a couple months without a tenant and need to pay your own mortgage and utilities. In general, you should probably keep 3 months worth of total expenses in this bucket, unless you reasonably think you may need more. If you ever spend anything out of this bucket, replenish to the 3 month mark.

Once you have all those buckets filled to their maximum point (other than the Long-Term Expenses, which you keep filling every month), you should be able to safely take the additional money you have coming in and allocate it to other projects, salary, etc.

Btw, notice that the 3 buckets (other than the Long-Term Expenses) total about 6 months worth of gross rent. In general, I think this is the right amount to keep in reserves (plus the Long-Term funds), regardless of how you break it down into buckets.

The classic William Nickerson model was to take a certain amount from your units, coupled with your regular monthly savings, so that you can get to your next building faster.

His model was:

1. Save money every month from job.
2. Buy rental property.

From there it went:

1. Save money every month from job.
+
2. Save money from units
3. Buy (bigger) rental property.
4. Repeat.

The bucket approach (also known as the envelope approach) is a great idea as you build your portfolio. But there comes a time when the monthly income is great enough that it is time to play. I am not there yet, but when I reach $50,000.00 a month, I think I will be there.

I would also create an "income tax" bucket and if it is over funded at the end of the year, move it to the long term expense bucket.

Diane Kennedy, CPA has an article on the internet on Financial Planning. Her plan uses 5 buckets to place money into:
1. Security
2. Emergency
3. Income
4. Growth
5. High Risk.
The first 4 sound okay, but the idea of risking hard earned savinge does not exactly appeal to me.

Most RE books suggest you use other people's money (OPM) to finance your deals. By having a mortgage in place - you use OPM to buy the property. By using the rents coming in to pay back the mortgage - you are using OPM to pay off your loan. For an investor - it does not really pay to have the property free and clear.

I respectfully disagree. Having a $1,000 payment come in every month when you : a) have a PI of $650, or b) have a PI of $0 (free and clear house) makes a difference of $650/month (I omit interest deductions and such for now). $650*12=$7,800/year. You can pay for kid's college with this money, can you not? How much towards college tuition can you pay with mortgage in place? Not much, but you can take a school loan, right? :)

(At least) 2 schools of thought here as far as I can see - 1) finance all you can and 2) pay off sooner. I am not saying either is right, I just like the second one.