Rental Property Investor · Brooklyn, NY · Member since 2016 · 84 posts · 139 votes
Hi BP Community,
This year in June I purchased my first buy and hold property - a duplex. I know that it is important to have cash reserves set aside for unexpected issues that may arise with the property. However, should I just be sitting this money in the bank account that I have set up for it or investing it in some type of investment account so that it grows faster? If so, what type of investment account? Is that what the self-directed IRA accounts are for? I am wondering if there is something that I am not doing that I should be doing besides just saving it in the property savings account that I have. Right now all I do is collect the rents from the property management company each month and have the mortgage payment coming out just the same. Thanks for your advice!
Investor · Monmouth County, NJ · Member since 2020 · 7 posts · 4 votes
5y
@Nina Granberry I created a betterment account for myself where all excess funds go into to. You can choose a conservative balance so that you money grows more securely without being overly effected by the ups and downs of the stock market. Betterment will choose stocks automatically based on your goals so it is pretty hands off and your money still remains liquid.
Rental Property Investor · Member since 2020 · 215 posts · 137 votes
5y
@Nina Granberry
I take that you do not have mortgage or debt. If you have any if those, pay it. Mortgage i would accumulate a bit, and ask for recasting. Keep tenor and reduce payments, this will give you even more cash flow.
Another interesting way to accumulate is if you have a life insurance. You can deposit there and the cash value is a good source when you are ready to buy another property.
If you do not have mortgage, i would accumulate a bit, go to your bank and open a HELOC. With that would buy another property, taking the accumulated money plus the heloc. Then cash flow goes to pay the heloc. By the time cash flows increase and i repeat the process.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
5y
All my cash flow is put into maximum overfunded permanent life insurance.
That is the equivalent of a savings account that brings between 4.5 to 6% return, is asset protected against creditor, is transferred to your heirs tax free and also as an add on gives you a cushy life insurance coverage.
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
5y
@Nina Granberry
We have an emergency fund set aside for our duplex, and the cash flow goes into another savings account to buy another property. Besides a savings account there is no investment opportunity that guarantees a return without risk, so if you try to invest this money and things don’t turn out the way you planned you may be left with less money than when you started.  
All my cash flow is put into maximum overfunded permanent life insurance.
That is the equivalent of a savings account that brings between 4.5 to 6% return, is asset protected against creditor, is transferred to your heirs tax free and also as an add on gives you a cushy life insurance coverage.
I recently learned a bit more about life insurance policies. I was considering buying a whole term life insurance policy but need more guidance on how to make that happen (i.e. what company should i use, what is the process, etc). Can you share more about how to set that up?
I recently learned a bit more about life insurance policies. I was considering buying a whole term life insurance policy but need more guidance on how to make that happen (i.e. what company should i use, what is the process, etc). Can you share more about how to set that up?
The two main kinds of overfunded permanent life insurances that are used for these kind of strategies are Whole Life and Index Universal Life. Not all insurance agents are knowledgeable about them. Some are focused on one type of policy (like the infinite banking crowd with Whole Life), some will be more versed in both types and will be able to let you choose the one that fit best your needs. A good policy set up should lower the agent commission to increase your return, it is why some agents are not offering those as they are making more money selling other kinds.
You can reach out to @Thomas Rutkowski who is a frequent contributor in this forum and who has a great website on the subject.
Rental Property Investor · Member since 2020 · 215 posts · 137 votes
5y
Life insurance is NOT an investment. My post is a way to maximize IF YOU HAVE IT. the return in a Life insurance policy will only come after the 5th / 7th year... because you will spend money in Life insurance. There are several companies. if you want a referral, send me a message private and i will give you a contact to discuss/learn.
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
5y
@Nina Granberry
Insurance is not an investment vehicle. If you need insurance, get a term policy because it’s very cheap. If you want to invest, invest in real estate or the stock market. Stay far away from all of these other life insurance policies, they are garbage.
Dallas Fort-Worth · Member since 2019 · 64 posts · 33 votes
5y
Simple, keep a safety reserve and invest the rest. Ideally, it would be a factor of months of expenses. That way you have the safe of mind to know you can pay all obligations if push comes to shove. I personally have six months of expenses in the bank at all times, that is my risk tolerance. Your tolerance is up to you!
Attorney · Cincinnati, OH · Member since 2020 · 22 posts · 22 votes
5y
@Nina Granberry great thread and learning a lot from all of these responses. From the BP Podcast, it really varies based on risk tolerance, but certainly need to save up a portion (6 months worth of cash flow is reasonable) for major capex expenses depending on the condition, age, and deferred maintenance of the property. Lifestyle decisions also play a role (obviously), but to the extent you can utilize the cash flow to improve your property to a reasonable level (you do not want to overdo it) and park some into the business account for future expenses, this could be a piece of financing that you can use to creatively finance your next property.
For that I would recommend reading Brandon Turner’s book on investing with little to no money down — it’s a book that puts financing tools in your tool belt to creatively invest. One principle is that a little of your own money helps generate creative financing (private money, hard money, lease options, seller financing, etc.).
At bottom, saving is not exciting, but will provide you with an Avenue to craft creative financing opportunities with other REI's in your community in the future. Best of luck!!!
Congrats! I also find the “how much to keep in reserves” question to be hard. I see a lot of 6 months of expenses answers. If you expenses are say $1,000 a month but a new roof costs $10k, you are coming out of pocket or have to borrow.
Right or wrong, my goal is $15k in 5 years to get saved. I figure that allows a water heater, a roof, and other things to be affected. After that, I won’t save more. Is that too much to keep? Maybe, but I am being conservative. I think pick a number that works for you. If you are fine with $2k, do it. If you would feel better with $15k, do that.
@Nina Granberry you are lucky if you getting cash flow. We typically max ROTH IRA every year and max 401k or save for down payments for other properties
Rental Property Investor · Fredericksburg, VA · Member since 2020 · 27 posts · 12 votes
5y
@Nina Granberry
Hi Nina, M.C Laubsher has his “Cashflow ninja” podcast that you can find on YouTube. He explains this very well and they also assist with setting up your policy to achieve what you’re looking for.
Investor · Mesa, AZ · Member since 2019 · 53 posts · 63 votes
5y
Hey Nina, that's a good question. I put it all aside for a rainy day. Once you get enough properties to where you can have a large amount of cash flow coming in that can handle a few big repairs all at the same time, then you don't need to just sit on things. You will know that all the money that you need will be there each month.
Another thing to think about is if you do have that money in another investment, how liquid is that? If you have an AC go out and you can't pay for a new one for another 7 days, that won't work.
Right now I just passed the one year mark for owning my 4-plex and I am still replenishing my cash reserves. But I am looking forward to the day when I can have so many units that the cashflow coming in will surpass any repair that comes up.
Investor · Monterey Area, CA · Member since 2011 · 150 posts · 81 votes
5y
@Nina Granberry
Hi Nina, like @MikeS , wrote, you can look into Whole Life Cash Value or similar types of insurance.
Liquidity, stability, you can borrow against your policy, and if structured properly, your principal continues to grow. At approximately 4-6%- a company like Paradigm Life does this. Also look for Douglas Andrew’s LASER info on YouTube.
Insurance is not an investment vehicle. If you need insurance, get a term policy because it’s very cheap. If you want to invest, invest in real estate or the stock market. Stay far away from all of these other life insurance policies, they are garbage.
While term insurance is cheap when you are young and healthy, not everyone can afford a term life insurance when they age or got a preexisting medical condition as not only are they becoming extremely expensive, but also you may be denied coverage by the insurance.
By getting a permanent life insurance when younger, you are locking-in your current health status. You are also building cash value that you can borrow against with plenty of tax advantages. So if you need life insurance, while term insurance is less out of pocket money immediately (that doesn't mean cheaper), it may not be in your best interest in the long term.
You may believe that permanent life insurance is not appropriate for your specific situation, and it may be right. But stating that all permanent life insurances are garbage is a blanket statement that proves that you never really studied the product and are only relying on other's statements, perpetuating some of these myths. There are hundreds of members of this forum, myself included, who are using permanent life insurance as a tool in their overall investment strategy. The same way some people in the financial world are bashing mortgages and HELOC, saying that you should only buy cash. For some people that may be true, but the majority of real estate investors are using mortgage and HELOC successfully.
Congrats! I also find the “how much to keep in reserves” question to be hard. I see a lot of 6 months of expenses answers. If you expenses are say $1,000 a month but a new roof costs $10k, you are coming out of pocket or have to borrow. Right or wrong, my goal is $15k in 5 years to get saved.
Early on I kept a $5k emergency fund for my rentals. Cash was too valuable to boost to $15k per house. I would have missed opportunities. I was pretty broke and really hungry for deals so YMMV.
Later I just kept a portfolio reserve of $30k. My largest outflow and vacancy/no pay months over the last 15 years twice have been just under $30k, with a few 10s and 15s here and there.
$15k for one house is too much of an ant, my $5k for 3 probably too much of a grasshopper. Be a Goldie Locks 👍
Man your question takes me back to right after I got my first place! (That happend to be a duplex as well) I was so hungry for growth I wanted every penne working as hard as possible!
Almost 30 deals later I have realized that cash reserves do an epic job at what they do best... Provide insurance.
Looking back I now realize that spending mental capital to try and find a few more dollars to max out my return by getting 1 or 2% on my savings is just a distraction from getting a 1000% rate of return in real estate.
So with that said. Keep your hunger for growth alive but don't get distracted on the small things.
Josh, this is so spot on. The mental capital spent trying to earn an extra $25 a year is unreal.
Whether your return on a reserve / opportunity account is $50/yr or $200/yr really won't matter years from now. Your return is the insurance and opportunity it provides to be able to move quickly.
To be able to act quickly, the funds need to be liquid, not in insurance or a CD or bond. The savings rate matters much more than seeking out an extra .2% while it waits to propel you.
where to store your cash ? short term investment: invest in hedge funds followed portfolio. I can do 0.5-1% most of the days. long term investment: invest in portfolio of SFR/MF in CF/appreciating market.
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
5y
@Mike S.
Still makes no sense, because when you're older you have gained wealth and you can self insure and there's no need for life insurance anymore. The only insurance I'll be buying will be long-term care insurance. Oh and car insurance and investment property insurance and umbrella policies to protect my wealth. . And if I want to generate wealth I'll just continue to max out my Roth IRA‘s and make a killing that way, my 401(k)s and my cash flow from the rental properties.