When is it safe to start "paying yourself" from cash flow?

4 Replies

Hi all,

First time landlord in the Boston area here. Quick background: wife and I are moving to NH after being in a Somerville condo for 3 years. It has appreciated about $130k since we bought it ($570k to ~$700k). We were able to keep the condo and rent it out and it should cash flow (after mortgage, taxes, HOA and all expenses) around $250 a month. Obviously won't be the greatest cash-on-cash return if i were buying solely for a rental property, but the plan is to try this out for a while while betting that appreciation in Boston market will continue. We'll re-evaluate next year and decide whether to pull out the equity we have and invest in cheaper markets where the cash on cash return would be greater.

Anyways, I've read "The Book on Rental Property Investing" just to give me some background on real estate investing in general and the advice there is to keep 6 months of full expenses in cash reserves. He also outlines later on in the book how to account for big ticket capital expenses from a monthly budgeting perspective. So my question is, when do you consider it safe to start reinvesting the cash flow coming in? If you've already got 6 months of reserves in the bank, does a quarterly distribution of the cash above that make sense (where it could then either be re-invested into something else or saved for another downpayment)? Or should you just keep piling on the reserves for when that big ticket item like a new roof comes in? And how do you guys account for those unrealized, large expenses when analyzing your investment performance where you had budgeted for those expenses but haven't actually realized them yet (e.g. I've been budgeting for a new roof for 3 years but have not actually realized that expense yet and have actually re-invested some of the cash that would have otherwise gone towards that because I have enough in reserves)? 

Thanks and looking forward to being a part of the BiggerPockets community!


Safe?  Depends on so many factors...  I like the idea of 6 months of opperating reserves if everything fails.   But if the Real Estate Investing is a side hustle for you then keep rolling the cashflow back into your investing so it becomes compounded.  Once you make 80% of your day job income thats a close time that you will break even if you decide to stop your day job and do investing only.   or not work at all.  

Your reserves could be built up for new BRRRRs or flips where you can pay yourself back, Worst case a AC unit goes out and you put it on a cc untill you sell or refi your new investment and pay yourself back.  Key to it is to hold yourself accountable.  

Another variance is if you save 5% on your property but also have 6 months reserves if you buy a place that needs a lot of work you can just do it all upfront and not have the need for the CAPX.  Do a new roof, AC/Heat and such, repalce it all by buying a cheaper property and you'll know the CAPX money youre setting back wont be needed but instead could be leveraged into the 3rd down payment.  

All of your money should be working for you, in some form or another.  

Given the low month to month cash flow of your place and the rate at which big projects come up, I would probably save the $250 every month and never pay yourself. Keep it on the appreciation plan for now.

If you want to improve cash flow, try renting out the bedrooms individually without using a realtor. I charge about $1200-1250 a room in my 900 squ ft Somerville condo which is close-ish to Porter Square. People are willing to pay a bit more than market rate if they can dodge the realtor fee.

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Thanks for the insight guys. So @Account Closed you're basically saying that you'd keep building that reserve up even after I've covered 6 months as opposed to investing it? I should have been more clear that when I said "pay myself" I really meant re-invest into something else (stocks, Fundrise, etc.). That's an interesting thought on renting out per bedroom, hadn't considered that. I ended up getting $1,500 per bedroom close to Teele Square, so was happy with that. Just curious, what do you consider as "low" or "high" month to month cash flow for this area? 

Basically I'm skeptical that you'd get to 6 months of reserves if you're cash flowing $250 a month. That'd assume a clean cash flow of $250 a month for what, several years? Between minor maintenance calls (each at least $100) and the "big ticket" items like roof, siding, washer dryer, dishwasher, oven, etc that will need to be replaced, that will be hard to hit in the first place. One item like a roof (even split with the other condo association members) can wipe your reserves clean.

In general the ship has sailed for cash flowing properties in the Camberville area. People are lucky to break even and ride the appreciation train. The only people making good money month to month are the ones that got 3 families for 100k back in the 90s and 80s.