Hello BP,

I have a few questions:

First

I recently acquired my first tenant in a house a hack. Today I opened up a new checking account with my bank, and I either need to have direct deposit setup with a minimum of $500 deposited each month (which I can't do because this is rental income), or I need to maintain a $1500 balance at all times to avoid a fee. Is there a better way / account that I should be using for receiving rental income so that my $1500 isn't wasting away not working?

Second

What do you do with your rental income to make it work for you? I was thinking about forwarding it onto my online savings which has a 1.5-2% interest rate, or sending it to my individual broker account and investing it in a mix of VTI / other index funds. To me though when I invest in index funds the goal is long term, and I want to access my rental income within the next year or two to get my next property, I don't want to potentially lose money when I need to pull money out for a deal, and also don't want to pay any captial gains taxes, but the online savings may not be the strongest way I can park my money. Ideas?

Thanks

If the $1500 is saving you a monthly fee, then it's really making that money for you. It's not that much to keep in an account. Have you shopped other banks? 

$1500 invested at 1.5-2.0% is only a couple of dollars per month.

Yes, many investors park their liquidity in online savings accounts.

@Michael King

I could have $1500 in a checking account that yes, prevents me from being charged $12 a month as a service fee

OR

I could have $1500 in a online savings account with Discover or Amex that gives me a 1-2% interest rate on my money, even if its just a few bucks.

I agree $1500 is not a lot of money, however it is just sitting in a
checking account not doing anything (ie, not invested making me a few
bucks), it's just a placeholder for the account to hold the fee. My
question is to gain some insight on what others are doing that I may not
be thinking that is a much better option. In a few years, that $1500 will be worth less than what it's worth today, that's what i'm trying to prevent.

@Mathew Fuller Thanks Matthew. Some banks charge more to do the same thing. Like $5000. 

My bank waives account keeping fees if I spend more than $250 a month on the credit card they issued with the account. Plus it pays back 1% on purchases. I easily spend more than that, but never carry a balance from one month to the next. This is Bank of America. My wife has the same account, and she really easily finds a way to spend $250 a month. 

$12 a month in fees is almost a 10% charge, based on $1500. So chasing 1-2% or even 6% you're sliding backwards.

An online account that gives 1-2% interest is awesome; I'd probably go that route if 1% is what drives you. Or better yet, buy a good dividend stock that pays 6% or more, like T, or GOOD...there are lots. Or even better, keep it in the account and keep building on it for your next deal downpayment. 

We live on our rental income. I have a couple online banks for reserves that pay significantly higher interest rates than my local bank but it's still less than 2%.

I'd invest a few minutes in finding a bank that doesn't have b.s. fees and minimums. BOA, Wells, yuck. Smaller community banks and CUs have free checking.  Chase has free premier accounts for veterans and that's awesome.  Free checks, free cashier's checks, no monthly fees, etc. 

Honestly , a savings account is insurance and not meant to nor will it earn you a lot today. I keep my opportunity fund in a money market earning about 2%.  It's purpose isn't to make money, but to be available to jump on an opportunity while it mostly keeps up with inflation. The opportunity is suppose to make the money, the rainy day fund to keep you dry when it rains 👍

@Mathew Fuller traditionally i have parked it in more rentals is the right question. I'm not sure why you would make 20% returns in real estate and park money in bank or traditional places making far less. Starting in feb 2020 I'm going to park rent income in my personal bank account and be a full time investor

@Mathew Fuller

We do a few things. The small bank that has loaned me money for a few properties requires a checking acct. we use that acct to hold 6 mos reserves for each property. But.. that bank is 45 mins away. We keep a checking acct at a TD bank 2 mins away for deposits of money orders (then transfer $ to wherever it needs to go) as they typically won’t work on the mobile app to deposit. The local TD has a $100 minimum for no fees. Any excess monies go into an online 2% savings.

@Mathew Fuller , I agree with Steve above about finding another institution. I have a local credit union that I keep my business accounts with for my rentals. I have a small business checking account as the operating account for rents in and mortgages out. I then have a separate business savings account for reserves for each property. I pay zero fees and no minimum balances. Interest rates are negligible, but I like having these separate from my personal accounts (where I do utilize things like high yield savings accounts, etc.). I also have a HELOC with them on my primary residence to use for investment properties that cost me less than $2 to establish (they ran a promotion with no closing costs and I'll I had to do was draw $15K at closing for 1 business day and then I could immediately pay it back). I would look for a local credit union in your area and look to build a relationship with them.

@Mathew Fuller - depending on your risk tolerance then A) use your income to pay down other debt then your mortgage or fix up your property and refi (ideally so you don't have any PMI). B) invest the income in the stock market index funds C) invest your income in a high yield savings account 1-2% especially if you need cash slush reserves fund for potential future capital repairs like $10,000 for a roof or furnace.

@Mathew Fuller

I’m considering putting all of my cash flow into a whole life insurance policy that pays 5-6% interest. In the future I will borrow against the cash value, or use it as collateral to secure a loan.

@Mathew Fuller look into a credit union. I hate banks that charge fees like that

Since the interest is not life changing I would just keep it somewhere that you have easy access to when you need it. Because things will eventually happen in this business where you need quick access to cash. 

@Michael Chilton look for a Fraternal non-recognition policy. You’ll get more than 4-5%. Mine has 4% guaranteed with a dividend on top of that. Only do it if you plan on over-funding the policy.  Fraternal companies have tax benefits others don’t that can increase your dividend.  You’re right. Storing your money in a policy like that will end up earning yourself a free life insurance policy in the long run. The secret is to plan on letting the policy season for a minimum of 3 years before borrowing against it.the longer it sets, the more you make. 

Since I generate approximately 30% cash-on-cash in my investment properties and businesses, I do not focus my efforts on finding the best interest-accruing deals. I reinvest as much as I can into my business interests which then return hand-over-fist. I do have a money market account at a local credit union to park cash (I hate excess cash) until I need to use it. The money stays in the account for no longer than a few weeks. I usually find ways to improve my properties and proactively attack maintenance issues.

investingpirate.com

@Mathew Fuller

First, find a new financial institution that doesn’t charge you all that.

For my properties owned in my personal name, we keep a few thousand in a savings account, and the rest we invest in Vanguard VTSAX.

For my LLC, with partners, we have a separate LLC bank account that we keep all reserves in. No risk for losses.

I have a savings account where I am currently putting my cash. I only have one SFH that I rent out that cash flows about $325/mo. The amount of time to spend moving money around and evaluating index funds isn't quite worth it right now. In addition to a Checking account where I maintain a balance just enough to cover monthly costs, I am putting my money in savings account. At some point down the line, I plan on having a savings account for maintenance items and another savings account for my security deposits. I may have a third savings account to save remaining cash flow profits to be saved up for additional investment properties, but I am not sure yet.

Many local, smaller banks do not have those fees. You can also go the online route with a bank such as Ally.

Originally posted by @Michael Chilton :

@Mathew Fuller

I’m considering putting all of my cash flow into a whole life insurance policy that pays 5-6% interest. In the future I will borrow against the cash value, or use it as collateral to secure a loan.

 These policies do not pay 5-6% interest. Most likely the insurance sales person showed you some charts and made some big promises. They probably told you that you could get 5-6% return, your money is safe and you can borrow it later paying interest to yourself. This is highly deceptive. 

They probably didn't tell you how much money goes to commission and fees, which can easily be 100% of the first years payments. They also probably didn't tell you if you cash out within the first five years, it is a total loss. Even after that, it can take over 15 years before your cash surrender value is equal to what you invested. So where does the 5-6% come from? 

The insurance company takes your payment and splits it three ways:

1. Insurers costs and profits, commissions and fees.

2. Death benefit, what I call "term portion" of the payment. Basically it covers early death to pay premium.

3. Cash value, which is the portion they invest. They put money in mostly bonds, some mortgages and a little in the stock market. Obviously the fact that they put so much in bonds is why the investment is stable, but also doesn't add up when you consider bonds pay lower interest.

This is why the math doesn't work. Once you subtract off commissions, fees and "term" portion, you are left with only a portion to invest. Of that portion, it mostly goes into bonds, which are historically not a high performing asset. There is just no way to get to 5-6% return on what you paid in. Independent analysis have shown actual returns are as low as 1-2%. 

Most likely the insurance company "slight of hand" occurs by not including insurers costs or death benefit costs when calculating returns. By subtracting out these fees, it inflates returns.

If you need insurances you are better buying a term policy and investing the difference according to your risk tolerance. That could be bonds, index fund or real estate.

Read up from independent sources and really question what you are being told. Once you buy these policies, you are basically trapped.

https://www.consumerreports.org/cro/news/2015/04/is-whole-life-insurance-right-for-you/index.htm

https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

@Joe Splitrock I have had several clients who have been told "pay x for 10 years" then you will be fully funded and not need to make any contributions as it will pay off the premiums.  Then 20 years later, the policy is negative as it has been taking out loans to cover the payments, has a cash value however the debt forgiveness in closing the plan put then to a net negative....  There was also a guarantee by the insurance company that it would work which was worth nothing...

To the OP - options are simple - leave $1,500 in the account or find another bank that doesn't have the fee.  I have multiple accounts at WF with minimums and accounts at a CU that don't have them.  WF has me tied down right now as my cost of change (changing all auto-payments, etc) is greater than my benefit (no minimum).

I "lose money" to inflation sitting on cash but I don't have much time to play around looking for options and know cash is king in certain areas of RE.

@Mathew Fuller

Dave Ramsey teaches to put it in mutual funds until the amount exceeds what you need for the purchase (100% in his case, 20% in most others)

@Mathew Fuller

While I don't have the answer to your questions just wanted to point out 2 things based on your post. It seems you have a WF checking account. In order not to pay the monthly service fee you could do:-

A. Swipe your debit card 10 times each month. Look on your activity report to see how many you've done for the month and by when you would need to get them all in. I used to make small necessary purchases this way. Then I realized I paid my HDepot cc promotional balance monthly, so I had the cashier make six, $10 payment leaving me to only fill 4 more swipes to avoid the fee. Now mark you, HD is 3 mins from my house so when I did this to me it wasn't a big deal to stop by once monthly or while am already there. Then I'd reward myself with a six-pack or a bottle of wine or some other vice.

B. Your rental income deposited to your account in excess of $500 also allows you to avoid the fee depending on how your collection is set up. I use Cozy so it's a direct deposit.

Now you can go partner with someone and use that $1,500 to make a couple hundred bucks a month. Hint, think of someone who flips other items than RE but short on cash.

Cheers.