What should I do with excess cash flow (after expenses)

Question

I know this is based on the goals I have for my self but a general rule of thumb, after deducting expenses from my cash flow, should I

A) Use the extra $ and put it in the mortgage

B) Save, save, save to buy another property in the future

C) Is there a third option that I'm missing?

Dave Poeppelmeier · Answer

Reserves. It's very tempting to just want to keep buying, but either save your profits or contribute your W2 income to make sure you have money for the unexpected roof/furnace/leak/etc. I made that mistake early on, and luckily it didn't bite me too bad. Don't rely on lines of credit either (HELOC, CC, etc). Those can disappear overnight, then you'll be very exposed to the big unexpected event. Commercial banks also like you much better (down the line, of course) if you show you have Reserves in place.

Andrew B. · Answer

Do you have reserves? First goal should be to build a nest egg to help in case there is a pandemic and youre not allowed to evict for a year.

Next would be to save up for another property.

I would only consider paying down my mortgage if I was planning to retire soon and wanted to stop growing. I would save up and pay it off all at once though. Better to have that windfall in my pocket as long as possible.

Alecia Loveless · Answer

@Peter Kim Save up for reserves first.

Personally I always put a little extra toward my mortgage each month. Not a lot because it’s better invested toward another property but depending on how much cash flow after expenses and reserves maybe $50-100. But that’s just me. Once I build more equity I might not do this but since I’m starting out I think it’s important so I can build a better D/E ratio for future investments.

Then I save the rest for future investments.

Alexander Szikla · Answer

Hi @Peter Kim. Obviously, C gives you a lot of options. Redeploy capital into the stock market, real estate syndications, lifestyle, etc.

I'd recommend against paying down mortgages quickly. Probably best to scale your equity with more leverage (all time lows) and buy more property. The spread is where you get rich!

Are you active in NYC?

Esmeralda Lira McGee · Answer

@Andrew B.

I would save up for vacancies, damage to the property and court cost. While you are in the process of possibly repairing a property or evicting a tenant you will have carrying costs.

Evan Polaski · Answer

@Peter Kim, place it where it is earning you the most money for the risk level involved.  There is a lot of nuance to this.

Let's say for some reason your mortgage is 12% interest, and if you buy another rental or invest elsewhere you can only earn 6% return on investment.  Then you pay your mortgage down.

In reality your mortgage is probably very low rate, and you can invest in just about anything and earn more, then you invest and keep your mortgage.

The only thing that matters is trajectory of capital (netting in tax effects).  If it will take you years and years to save up enough to buy another property, and you let that money sit in a savings account earning 0.25%, you are already behind the curve.  You need to invest it today in something with a fair amount of liquidity and relative low volatility to keep it earning for you, until you have enough to buy the next property.

Sam Fickel · Answer

I don't have any rentals yet, but one thing I'd like to do is get to the point where I can cash flow enough to pay my personal mortgage.

There's a big difference between debt, and debt paid by others. The mortgages on the rentals, in my mind, are not the same kind of debt as my mortgage. So if I can get to the point where I have OTHER people paying MY mortgage, that's a big milestone in my eyes.

Peter Kim · Answer

@Theresa Harris @Andrew B. Thank you both for your answers!

Theresa Harris · Answer

Option b or just save it for some other purpose.  If there is a reason you want to pay the mortgage down faster (eg retiring and want more cash flow), then do option A.

Joe Villeneuve · Answer

A) A most definite NOOOOOOOOOOOOOOOOO.

B) Possibly

C)  Send it to me.  Just PM me for where to send it.

What should I do with excess cash flow (after expenses)

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