Flipper/Rehabber · Winchester, VA · Member since 2019 · 56 posts · 16 votes
I know this depends completely on ones risk tolerance, but I'm curious what you would do, or have done, and how it worked out for you.
Currently I'm working on the former vs. the latter, but it is driving me crazy! To keep me sane and help time to go by, I study, analyse and read/listen from you guys.
Personally, I invested prior to saving my emergency fund. I bough a duplex that cash flowed $600 the first year and then I did a cash out refi and got back around 5k.
I don't recommend this approach because it really hindered my other investment opportunities for that entire year since I did not have any other money saved up, I had to put at least 7k into the property in rehab and I had a tenant leave after the year.
An emergency fund will serve as your cushion, and your investment funds should be enough to cover all of these "unexpected" investments.
This is just my opinion from my own experience. Everyone is different and like you said depends on your risk tolerance.
Not sure how I would pay for a medical/car/house emergency immediately with gold or silver.
I'm all for putting that emergency fund into a low yield, easy access account for when it is needed if it is for my families well being. This takes quite a bit of pressure off my shoulders by planning for their safety prior to planning for their future, though I'm doing both. ;)
@Michael Jackman, put your emergency fund first and then invest. There are not only going to be sunny days in the future and you want to be prepared when that time comes.
Personally, I invested prior to saving my emergency fund. I bough a duplex that cash flowed $600 the first year and then I did a cash out refi and got back around 5k.
I don't recommend this approach because it really hindered my other investment opportunities for that entire year since I did not have any other money saved up, I had to put at least 7k into the property in rehab and I had a tenant leave after the year.
An emergency fund will serve as your cushion, and your investment funds should be enough to cover all of these "unexpected" investments.
This is just my opinion from my own experience. Everyone is different and like you said depends on your risk tolerance.
Oh, the stress when it comes to the ebb and flow of one's bank account haha! For me I've opened a HELOC for my EF and have been using my cash to re-invest in other properties so I can grow quicker. Then, I refi said properties and replenish the funds. Then I repeat the process.
Like you said though, it's about your risk tolerance. It's also about the deal, as well as how fast you can get your money back.
I saved for the emergency fund first. We are at or very near the top of the cycle so keep that in mind. The number of newbie wholesalers has skyrocketed and the hype can only last so long. Don't jump into the game without a safety net. Just my 2 cents.
Thanks for the input everyone. It is interesting to see here the wide spread of risk tolerance on display.
I'm curious, for those of you who are more risk tolerant and invest with all you've got and "Come what may," how you handled the emergencies (if any) that came? At that time did you wish you had the emer. fund or did you just roll with it and not even worry about a thing? Or would you reconsider now having gone through the extra stress?
I'm glad I did what I did (I'm still doing it) or I couldn't have grown as quick. I've never 100% drained my capital and I've had a HELOC for use as well when-needed. Also, more importantly, I try to only tie up capital for 30-45 days max. The goal is to keep recycling it and moving it forward!
I have my emergency fund/downpayment for next property sitting in an s&P 500 account. I don't let it go below 3 months work of expense; that three months of expenses would cover all of my personal living expenses and cover the mortgage on rental - everything.
Once I get enough in there to buy another property, I will buy another, but I wont let it go below three months.
In my opinion, you are asking for a disaster if you literally don't have any money. Also, since it is invested, it is making me something while I'm looking for the next place to buy.
@Michael Jackman I misread your original post. I thought you were referring to keeping hundreds of thousands in the bank. For sure it’s always a good idea to keep a little on hand.
Beginning, 6 months rent (assuming you’re cashflow positive) for each property.
Later, when you’ve got say 4 houses or so, you can likely cut that down to 6 months rent x 3/4.
Later still, 3 months rent/ property.
Get good at operating and the risk goes down. Until then expect headaches. Even if your tolerance remains the same, your risk level goes down with experience.
2018 and 2019 were rough years for me with my properties. Everything you can imagine broke and cost me a ton. My back up plan was to put expenses on credit cards. I was still able to buy a property in 2018 and a couple more in 2019. And just snagged another SFR this week. I racked up my no interest for a year credit cards a little. But paying them off aggressively has been working for me. I also did a few BRRRRs and was able to pay myself back a little with cash out refis. If I find a deal, I just go for it even it costs me a little in the short term. Most on here probably think this is a little reckless, but it's worked for me and I'm cash flowing over 3k/month with nine properties. I attribute that to just diving in and going for it. Once these 15 year mortgages are paid off I'll be cash flowing 12k/month. My goal was to cash flow 10k/month after 15 years of investing with paid off props. Dave Ramsey would go nuts on me for not having a huge emergency fund and for having 7 mortgages. But it's working for me and I haven't turned back. Good luck!
2018 and 2019 were rough years for me with my properties. Everything you can imagine broke and cost me a ton. My back up plan was to put expenses on credit cards. I was still able to buy a property in 2018 and a couple more in 2019. And just snagged another SFR this week. I racked up my no interest for a year credit cards a little. But paying them off aggressively has been working for me. I also did a few BRRRRs and was able to pay myself back a little with cash out refis. If I find a deal, I just go for it even it costs me a little in the short term. Most on here probably think this is a little reckless, but it's worked for me and I'm cash flowing over 3k/month with nine properties. I attribute that to just diving in and going for it. Once these 15 year mortgages are paid off I'll be cash flowing 12k/month. My goal was to cash flow 10k/month after 15 years of investing with paid off props. Dave Ramsey would go nuts on me for not having a huge emergency fund and for having 7 mortgages. But it's working for me and I haven't turned back. Good luck!
Honest question. I am genuinely curious.
Do you ever worried that one of these days it won't work out the way it has so far? You have made incredible progress(way more than me, which if why I'd like to learn from you), but do you worry that something going wrong could start a domino effect that would end in bankruptcy? Do you have some sort of strategy to be so aggressive that also prevents some sort of catastrophe down the road?
Ha! Ramsey was dumb with his investments when he was young. Sounds like you are staying away from ARM's, so you should be good. At least you could still sell as an exit strategy....assuming there is substantial equity.
I am all for someone going "All in" as long as they can stomach it. I have a large family and because of that have become more conservative financially. Plus, I made some risky decisions in the past that made life a little too stressful for my liking and I swore I wouldn't do it again.
Yes, my back up plan is to keep lowering rent to keep people in there if we have an economic collapse like in 2008. I paid off two properties which helps me cash flow about $3,400/month. So that extra cash helps build a little buffet for when the music stops. I plan on reducing rent 20% or more if there is a surge in vacancies when things go south. Most of my properties are in cheap C class hoods with rent averaging only around $1,300/month. I could stomach dropping rent a few hundred a month per property if I have to. I’ve talked to many people who survived the last housing crisis and most didn’t have to drop rent too much if any. People will always need a place to stay. Maybe people paying 2k/month In B class neighborhoods might downgrade to the cheap C class hoods that I’m invested in. I’m more of an optimist so I don’t worry about this that much. Every penny I make right now just goes right back into more investing. I’m probably doing it all wrong. lol. But so far it’s been working and housing is fortunately in demand. I’m sure it’ll all change soon, but for now I’m going to keep on plugging away..even if I’m only making $100-$300/door with my 15 year mortgages.
@John Morgan
So, essentially you are saying worst case scenario you lower your rents and your cash flow goes from 3,400/month down to, lets say, 1,600/month, but you are still in the red? that makes sense to me. I better got my butt in gear! :)
thanks for the response!
Hey Michael, I think you should get a cushion of the emergency fund first. I bought a house hack with basically zero cash leftover after closing, and even though it’s basically covered my living expenses it’s stressful. The AC unit is 16 years old and I’m in Florida, so it could go out anytime. These “what if’s” with little cash reserves make the experience much more stressful than it should be. Definitely get the emergency fund in place first.
Yes! However, I don't anticipate having to lower my rates much in C class hoods. Maybe the one property I have in a nice B class neighborhood, but I don't see a lack of demand in the majority of my SFRs in the cheaper homes. Yes, by paying cash for two of my properties (That wasn't easy btw-took out a 401k loan, HELOC, withdrew 62k from our Roth IRAs and used all my emergency $ etc to get the cash to purchase the two properties), that extra cash flow plus the $200 a door on average I'm making on the rest of my rentals gives me plenty of cash flow each month in case the poop hits the fan. Again, I'm probably over leveraged and don't have nearly enough emergency funds on hand, but I was able to pick up 9 properties in five years.
I will draw a distinction here that there is the topic of having an emergency fund for your business(each rental property is it's own microbusiness) and a separate emergency fund for your personal budget. As a risk adverse individual I would say never sacrifice your personal family emergency fund for an investment. You want each investment to provide a blessing to you and your family not become a burden, which can easily happen without a proper buffer. I have established a 5000 emergency fund for each property then reinvested the excess either into additional principal payoff or other property. That has worked really well for us with 3 investments(2 paid for). Real estate investing is a long term game to retire well and leave an inheritance to my children's children.
I will draw a distinction here that there is the topic of having an emergency fund for your business(each rental property is it's own microbusiness) and a separate emergency fund for your personal budget. As a risk adverse individual I would say never sacrifice your personal family emergency fund for an investment. You want each investment to provide a blessing to you and your family not become a burden, which can easily happen without a proper buffer. I have established a 5000 emergency fund for each property then reinvested the excess either into additional principal payoff or other property. That has worked really well for us with 3 investments(2 paid for). Real estate investing is a long term game to retire well and leave an inheritance to my children's children.
Thanks for the clarification.
I completely agree with the separated funds. I was referring to having personal security blanket before saving up for investing but it is great to see where other peoples minds are.