Flipper · Macedonia, OH · Member since 2015 · 66 posts · 14 votes
Hello Everyone,
I understand that reinvesting back into your portfolio will help your business in the long run but what income do you live off of in the meantime? What is a good balance for living off of cash-flow vs reinvesting?
Investor · West Linn, OR · Member since 2015 · 100 posts · 58 votes
10y
@Kory Clark I think this is going to be different for everyone. For me, I live off of a % of my W2 income. All REI proceeds go back into my business to grow it... for now. I also regularly feed my REI business with W2 income.
Investor · West Linn, OR · Member since 2015 · 100 posts · 58 votes
10y
@Kory Clark I think this is going to be different for everyone. For me, I live off of a % of my W2 income. All REI proceeds go back into my business to grow it... for now. I also regularly feed my REI business with W2 income.
I agree that it's different for everyone. I'm starting off with house-hacking and working a regular job but I also want to establish a strong enough portfolio to where I can strictly invest, put money back into my portfolio and generate enough to where I don't have to work a traditional job anymore.
Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
10y
Hey Korey. I siphon off $100 per property per month and pay it to myself quarterly. This is not my living off of money... more like lifestyle improvement. I live off of my w2.
Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
10y
My business partner and I look at it in phases. Both of us are lucky enough to have solid jobs so consider ourselves in the acuisition phase. All excess RE cash and all extra W2 income goes into growth of the business. At the point we reach our goal of 25 units we will switch into the buy down phase. We will pay off the property we own and this will give us the option of quiting our jobs if either or both chose to.
That being said, it's only one of many ways to do it.
If you are going to actually quit your job then I think you need to have a LARGE bankroll to float the downtimes. I am horrible about saving a bankroll. Anytime I have $10k saved up I emmediatley begin to look for another home to buy.
Thanks. Do you have a sense of delayed gratification? When I get started ideally, I'd like to enjoy the fruits of my labor (sometimes) but I am also prepared to have patience.
Thanks. Do you have a sense of delayed gratification? When I get started ideally, I'd like to enjoy the fruits of my labor (sometimes) but I am also prepared to have patience.
Without a doubt. REI, especially buy and hold, is a grind. It is a business of time and quantity...and time. For me it's genetic, I can delay any benefit from REI for years and years, without a thought. So far I have been investing for 11 years and never taken a dime personally. I'm not sure if that is the norm but I am just fine with it.
Wow. That is impressive. Would you say your approach is on the conservative side? How close are you to the 25 unit goal?
I do think that by most peoples standards, yes I am conservative. The other thing that slowed me down was the frst 4 or 5 years we had no plan or goal. We would buy a property and then may not buy another for 2 years.
Before I will consider a property I calculate monthly rent - 30% (vac&maint) - PITI (on a 15 year note) = cash flow. That cash flow must be 12% CoC ROI. Those sorts of deals aren't laying around all over the place. I have and advantage in that we live in an area where a 3/1 home in a B class neighborhood can be purchased for $55k and not need more than a grand or 2 to be in rentable condition. That means that every $11k-$15k I get can buy another home.
We are at 16 units right now and purchasing about 3-5 a year so I would imagine we will hit our goal some time next year. We should have the whole group paid off 5-7 years later.
Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
10y
I don't plan on leaving my w2 until I am ready to retire. I like my job and it pays well. Real estate is only part of my retirement plan and part of my lifestyle plan. I set an original goal of having my properties make enough money to cover a car payment... because I took the cash from my "car fund" to buy my first couple of properties. Now my properties could cover my mortgage but instead I reinvest and take out a smaller amount quarterly. I then choose to apply that to where my lifestyle needs it. Pay off debt, vacation, toys, kids college, ect...the families decision. This keeps my family and i motivated to invest more but at the same time rewards us for the hard work. You can't take it to the grave and I didn't do all this work for nothing.... right?
Okay. I'm just starting out and really trying to figure out some goals. I just don't believe in the whole retire at 65 idea. My goal is to "retire" (invest full-time) sooner rather than later. Which is why I want to find that sweet spot of living off cashflow vs. reinvesting.
The question you ask is pretty open ended and I think you'll find the answer is as varied as the individuals involved in REI. For me, I wasn't able to take any money out of the business early on since I started from literally nothing and the properties were all distressed as well. I intentionally reinvested everything knowing I had to bring the properties into better condition to avoid vacancies etc etc. I wasn't able to take anything out and at times had to put W2 income into the business. The flip side of that was, I was building equity really quickly which allowed me to develop a LOC to use in place of the cash I didn't have in the beginning. I'm just getting to the point where I can take anything out of the business but I really hate to do that at any point so far. Cash flow is never enough ya know, I wish it was 10 times what it is because there is always another repair/improvement to make or another deal to grab. You will have to find your own balance but it will be fun for you to figure out as you build a company for yourself.
I think that is a great goal. A lot of it depends on what you need to "retire". If you can live off $3k/month then that is significantly easier than if you want $20k/month. Like any form of self employment, you need to have enough cash in your business for the lean times and enough cash personally for when the business can't pay you the income you need. Large piles of cash is the answer to all problems.
Flipper · Macedonia, OH · Member since 2015 · 66 posts · 14 votes
10y
@Mike Landry absolutely. I have that one small goal that I'm currently working towards.
@Jeff McCaskey That makes perfect sense. I enjoy hearing all different perspectives. I like to keep an open-mind. Starting off I do have my own ideal balance but in time that could change and someone else could help lead me to readjusting my balance.
@Jacob Sampson Amen! Large piles of cash would be great. Being so young and not really having any expenses except student debt means I'll achieve "retirement" sooner but I want to set myself up for when life does happen and I am set (marriage, kids, etc...)
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
@Kory Clark I encourage you to use youth to your advantage. You can leverage the time value of real estate. What I mean is that 10 or 20 years from now property values and rents will go up significantly, at the same time you will be able to pay down or off your loans. I would reinvest all your profits and use your day job to support your life style. Even use your day job to fund your business!
You mentioned you want to enjoy the fruits of your labor, but why not just be happy you are building a future? If you are patient and direct all your money towards your business, you will have much more 10 or 20 years from now. Called it delayed gratification, patience or whatever you like.
I would recommend reading the book the Millionaire Next Door. The key point is that wealth is as much about spending as it is income. The other point is that the person who drives the fancy car is often broke and in debt.
I completely understand that. This business I am building is definitely set up for the long term. I believe that is something we all have in common. I trust that I will find that balance throughout my journey.
I will use an example. I purchased a house in 2004 for $104,000 and it rented for $895 per month. I had a 30 year mortgage and at the time and only 10% down payment, so I had PMI. My total payment per month was close to $900. It was not cash flowing, but by sheer force and will, I kept tenants in there and I contained expenses by doing my own repairs, cleaning, etc. Today that house is worth over$160,000. It rents for $1100. My mortgage has been paid off by reinvesting any cash flow to pay down principal and throwing extra money at it whenever I could.
I have collected around $150,000 in gross rents. Since I purchased, rents have gone up over 22% and value has gone up 44%. I have replaced carpet, paint and a furnace for major improvements. It is mostly time that has increased value, which is what I mean by time value of real estate.
I could have chosen to ride out the 30 year mortgage and used the extra income to fund other properties. Long story why, but I chose instead to pay it down/off.
You are correct that cash flow will generally increase with inflation. That means real estate is an inflation adjusted investment. If inflation gets out of control, real estate is protected.
My original goal was to own 10 houses and get them completely paid off. Assuming I had 10 houses that got $1100 per month, that would be $132,000 gross rents. After expenses I would have well over $100,000 income, which for me is plenty to live on. I would only have ten tenants to deal with and they are all single family homes that I could easily sell in any market.
Most people in their 20's are busy having fun and wasting money. My advice is to save every penny and invest in your 20's and 30's, and you will be financially independent by the time you are 40.
New York City, NY · Member since 2015 · 15 posts · 1 vote
10y
@Kory Clark just my two cents, @Joe Splitrock nailed it. As young investors, the time is now to build the lifestyle we want to live. By reinvesting your profits back into your business you may be delaying instant gratification, but you're setting yourself up for long term success. Right now I'm not concerning myself with aspirations of quitting my job and living off my rental income, I'm more concerned with acquisitions and growth. It sounds like you have a dream of early retirement, as we all do. I think the best way you get there is growing your company by reinvesting your available cash flow, I'd only withdraw money from your business if you absolutely needed it and it was an emergency. Discretionary spending is something I fund from my job, not from my investment portfolio. Every dollar I save in free cash flow now is hopefully multiplied 100 fold when I reach my goals later on.
Lowell, MA · Member since 2014 · 260 posts · 99 votes
10y
I'm going to agree with the common thought that everyone has their own strategy. I require any property I buy to have an 8+ cap rate potential. I tend to reinvest a lot of the income back into building improvements and updating the units make them desirable to the general public and to maximize the rental potential.