Investor · White River Junction, VT · Member since 2012 · 42 posts · 14 votes
I just recently purchased my 4th multi-family property this summer and now I am debating what my next step should be. My current goal is to reach 8k/month in cash flow. Here are my options as I see them.
1) Build up a separate capex reserve fund
I have about 13k in savings and 25k in Roth IRA funds which I can withdraw tax free as a backup, but maybe I should build up a separate capex account since I don't have a designated one.
2) Purchase another 2-4 family
I could use my 25k Roth funds as down payment on a 5th property that cash flows around $500/month and look to do a BRRRR. I don't think I have quite enough equity to do a cash-out refi (Each of my current properties cash flows between $500-700/month)
3) Pay down debt
I have about 15k left on a car loan ($300/month) and 25k left on a 401k loan ($650/month) which I used to fund property 3 and 4.
I am curious to know what you guys would do and am open to any other ideas! Thanks in advance for the input.
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
9y
Always remember this simple formula. Should your plans fail, what is your backup plan? Example, you start borrowing from your 401k or Roth IRA and are 40 years old and your real estate investment fails. Now you have no money and you're starting over and you still owe your 401k loan. Not exactly a wise move. Although if you've built up a sizable portfolio over time and you decide to take a chance on a real estate deal and it does fall through, well then you have something to fall back on.
But if you to a more wise and slow approach, you can find other ways to generate additional income, build up a 25% DP on a duplex that cash flows after all expenses and you have an EF fund, well you will sleep better at night and the odds that your investment will survive the tough times in your life is far greater then someone who sleep well at night with tons of debt who if anything should go wrong, which it does in life that person may be bankrupt. Which sounds better to you?
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
I would do step 1 and 2. You need to be putting away money each month for Cap ex. Not sure how many units you have and your property types, but around 3-5%, possibly more depending on age of building and features. I would then buy more properties and use that cash flow to pay off the 401k loan in time
Investor · White River Junction, VT · Member since 2012 · 42 posts · 14 votes
9y
@Todd Dexheimer I probably should have been putting it aside from the get go. Up to 11 units now. All my properties in the central CT area are around 100 years old.
@Marcus Johnson @Account Closed I feel torn between the Dave Ramsey and Grant Cardone philosophies. Thanks for the suggestions so far!
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
9y
You're house rich and cash poor. I'd stash a couple hundred K for those rainy quarters and future buying opportunities. No way I'd have that little cash on hand. As it is now I'm sitting at a 25% cash position.
I have very similar goals as you. Assuming you currently work for someone else and are looking to become financially free. Looking to reach $9,000 per month Cash Flow. I too purchased my 4th multi family property this summer. However, I started out with a small cash reserves account to cover CapEx, Vacancy, and Maintenance. I built into my analysis of each property monthly deposits into that account to cover those contingencies. So If you haven't been doing that , then, it would be my priority to get #1 accomplished.
Did you include the 401K loan in your analysis for properties 3 and 4? If not you should have. If you did great. I would not pay that off yet. You probably have a low interest loan and you are the bank. Win-win.
Unless you have a whole lot of personal debt I would not worry about the car loan.
Once you take care of the cash reserves I would move on to #2 and acquire your next property. Remember your primary goal "To reach 8K/month Cash Flow ". The only way to do that is to keep acquiring more properties. Once you reach that goal you can decide if you want to start paying off some of your debts.
Investor · Minneapolis, MN · Member since 2016 · 57 posts · 36 votes
9y
Derek,
I currently have three properties which total 5 units. With these units comes a bit over 500k in debt. I also have 20 k in student loans left.
Now, I am planning on building up reserves and throwing a tad extra at the mortgages each month.
Will one more unit make your portfolio that much better ? No. Will not having the correct reserves to deal with 100 year old repair costs potentially cripple your portfolio for a couple years? Yes. In my opinion the downside risk eclipses the upside so I would save for a year or two and mitigate the potential for those losses.
That is what I will be doing. I hope to have a million in debt by 30 but along side that I plan on having 100k in 401k and 25k in cash sitting there..just in case.
Have you heard of a self-directed IRA? This type of retirement plans allow you to purchase real estate with your retirement funds, the asset would be held in the IRA. You can also do other alternative investments such as, private lending, private placements and many other things. I would be happy to discuss this further and connect with you.
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
9y
Always remember this simple formula. Should your plans fail, what is your backup plan? Example, you start borrowing from your 401k or Roth IRA and are 40 years old and your real estate investment fails. Now you have no money and you're starting over and you still owe your 401k loan. Not exactly a wise move. Although if you've built up a sizable portfolio over time and you decide to take a chance on a real estate deal and it does fall through, well then you have something to fall back on.
But if you to a more wise and slow approach, you can find other ways to generate additional income, build up a 25% DP on a duplex that cash flows after all expenses and you have an EF fund, well you will sleep better at night and the odds that your investment will survive the tough times in your life is far greater then someone who sleep well at night with tons of debt who if anything should go wrong, which it does in life that person may be bankrupt. Which sounds better to you?
Investor · White River Junction, VT · Member since 2012 · 42 posts · 14 votes
9y
Thanks for the feedback everyone. It seems like building my capex reserve fund back up is the wisest choice right now.
@Account Closed I think I will consider a wise and slow approach as most of you are suggesting. I plan on making 6-7k additional income from a side gig coming up next month. I will plan on setting that aside to start building up reserves.
Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
9y
Are you saving a portion of your monthly rental income for capex, vacancy, and repairs? If you aren't, you might want to consider it. That way, your tenants will be building up your cash reserve for you.
I would buy another property before I would pay down debt, as long as my rentals are saving money for themselves. If I have a decent emergency fund, I hate having money in the bank. With the rate of inflation compared to savings rates, you're basically paying the bank to park your money there.
Everyone's risk tolerance and definitions of a decent emergency fund is different though.
Investor · White River Junction, VT · Member since 2012 · 42 posts · 14 votes
9y
Billie Miller now that I have some extra cash flow, I am definitely going to start setting aside funds for capex, vacancy, etc. I had about 50k set aside, but used most of it for my my most recent purchase.
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
9y
I sleep fine with plenty of debt. I would not sleep well with having such little cash.
I would bump up reserves. That's way to low for that many properties. I'm a fan of running lean, but you're one bad month away from borrowing for necessities.
I wouldn't pay off the car.
I would buy more properties, but I wouldn't spend my own cash on it unless I could refi it back out immediately. Unless you can do that I would start paying off my 401k debt and learn to raise private capital.
expansion is good, but you are trading a lot of net worth for cash flow. learn to leverage outside capital so you're adding to equities rather than shuffling them.
No themoney can be reinvested in more houses as it seems you are doing now and it can always be taken out of the IRA with or without penalty- so it depends on your circumstances.
Investor · White River Junction, VT · Member since 2012 · 42 posts · 14 votes
8y
UPDATE: Next week I am getting about 25k back on a refi cash out on one of my properties. What would you suggest for my next step? Set aside the full 25k for cash reserves, pay off some debt, perform preventative maintenance (furnaces, etc) or buy next property? Let me know your thoughts!
I would do step 1 and 2. You need to be putting away money each month for Cap ex. Not sure how many units you have and your property types, but around 3-5%, possibly more depending on age of building and features. I would then buy more properties and use that cash flow to pay off the 401k loan in time