Where do you park your free cash?

Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes

Hey, everyone! I'm in the process of buying my second property, which would give me 5 apartments total. This would give me roughly $1000/month in cash flow between both properties. I want to keep about $10,000 in cash liquid in case of an emergency with one of the properties, but what should I start doing with anything above and beyond that? My goal is to keep saving money to buy more multi unit properties, so I would need to be able to access it without too much hassle or penalty to buy more deals in the near future. Thanks in advance!

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Scott TrenchPro Member

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

10y

I keep a nominal amount of free cash in a personal checking account, and about $15K in a checking account for business and real estate related expenses. This $15K will increase now that I have another property and want even more of a cash cushion.

Every dollar over that is invested in index funds (my favorite is VOO). Sure, I risk losing all or part of it in the event of a market downturn, but historically, long-term investors have seen about 10-12% annualized returns in index funds like these.

My theory is that even if I lose (I lost a few thousand over the last year or so), I'm fine with that because I believe I'm taking the statistically correct approach over the long term. Sometimes, I'll cash out at the wrong times in the market cycle while buying a next investment property, and sometimes, I'll get lucky.

I think that this is a much better mathematical, long-term approach than parking dollars over and above those needed to stably maintain your life and real estate business in low interest savings accounts. That said, if you don't have the stomach to just stick with it through the tough times, it may be frustrating for you.

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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
10y
ally.com
1%apy free savings account. simple and easy.
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Gregory H.
Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
10y
@Craig Garrow - Working capital covering month-to-month expenses stays in a checking account.
Emergency fund covering 6-24 months expenses goes in a savings account depending on how big of a cushion allows you to sleep well at night. As @Alexander Felice said, Ally is great, top notch technology & good interest rate (in today's rate environment).
For monies over the necessary emergency fund, those for me go into a brokerage account. I fully believe in diversifying across asset classes. However, once you know you want another property, you can take gains on some equity holdings and transfer those funds to savings. The more assets/streams of income you have, the more likely something can be sold at a gain and those funds re-allocated to the next asset.
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
10y
I keep a nominal amount of free cash in a personal checking account, and about $15K in a checking account for business and real estate related expenses. This $15K will increase now that I have another property and want even more of a cash cushion.
Every dollar over that is invested in index funds (my favorite is VOO). Sure, I risk losing all or part of it in the event of a market downturn, but historically, long-term investors have seen about 10-12% annualized returns in index funds like these.
My theory is that even if I lose (I lost a few thousand over the last year or so), I'm fine with that because I believe I'm taking the statistically correct approach over the long term. Sometimes, I'll cash out at the wrong times in the market cycle while buying a next investment property, and sometimes, I'll get lucky.
I think that this is a much better mathematical, long-term approach than parking dollars over and above those needed to stably maintain your life and real estate business in low interest savings accounts. That said, if you don't have the stomach to just stick with it through the tough times, it may be frustrating for you.
Podcast Guest on Show #223
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Craig Garrow
OP
Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes
10y
Thanks for all of the replies! I've been reading "Money" by Tony Robbins. Seems pretty good, so far. Seems to focus a lot on index fund investments. So, from what little understanding I've got, I'm considering a ROTH Self Directed 401k. But I definitely need to do more research!
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Chris Soignier
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
Originally posted by :

However, once you know you want another property, you can take gains on some equity holdings and transfer those funds to savings. The more assets/streams of income you have, the more likely something can be sold at a gain and those funds re-allocated to the next asset.
Your basis in an investment is a sunk cost, and aside from tax considerations, shouldn't be a factor in a decision to sell. When you do factor in tax considerations, it generally makes more sense to harvest tax losses, at least to the extent you can deduct the losses in the current year.
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Alex J.
Investor · Tarzana CA and Houston, TX · Member since 2015 · 326 posts · 130 votes
10y
invest in muni bond funds that have high yield...something like a california bond fund so you get the uplift and liquidity when you need the cash think of like the pimpco funds that do this as a starting place... some funds even pay monthly distribution like a rental.
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Trevor Ewen
Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
10y
@Craig Garrow
We belong to a credit union in Michigan that gives us 2.8% on amounts up to 15k in their checking account. Since you're in NY (like me), I can only recommend that you look for something locally. Credit unions really want deposits and checking accounts, so they are known to give amazing deals like this. We have had this account since my wife was in college. Neither of us have been residents in Michigan for at least 6 years.
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Franklin Romine
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
10y
I use a regular business checking account for operating a reserves.
My personal strategy is to shove all of my extra cash into properties. If I have cash sitting around I'll spend it.
Real Estate is unique, real estate is a tangible, cash-flowing, insurable asset that I can borrow against. It is crazy how many people on BP and just people in general are still scared to pull the trigger and buy property.

Franklin
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Chris Soignier
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
Originally posted by @Franklin Romine:

I use a regular business checking account for operating a reserves.
My personal strategy is to shove all of my extra cash into properties. If I have cash sitting around I'll spend it.
Real Estate is unique, real estate is a tangible, cash-flowing, insurable asset that I can borrow against. It is crazy how many people on BP and just people in general are still scared to pull the trigger and buy property.

Franklin
I believe most of us would agree w/ you, but it often takes big chunks of cash to invest. The question is what to do w/ the cash while building up enough of it to purchase your next real estate investment.
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Craig Garrow
OP
Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes
10y
Absolutely agree. I'm all for shoving all my cash into deals, believe me! The ink is barely dry on the closing docs for my last purchase and I'm making an offer on a triplex tomorrow! I've wrestled with the idea of a retirement account too, though, and after a little more research, it seems like the ROTH IRA may be the way to go for me.
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Ronald PerichPro Member
Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
10y
I like @Scott Trench's thinking, but if I am saving up for the next purchase, I tend to be more conservative with the assets. Look back at history for why I choose that route.
S&P dipped in 1974, housing dipped in 74-76.
S&P dipped in 1982, housing prices dipped 82-86
S&P dipped in 87, housing dipped in 90
S&P dipped in 09...
I want my cash ready for the housing dips. Municipal-based bond funds. I like EILTX.
Invest at your own risk. Individual results may vary. Consult with... you know the rest.
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Steve Sapowsky
Investor · Granby, MA · Member since 2015 · 70 posts · 15 votes
10y
@Scott Trench put a stop loss on those index funds and keep raising the stop as the fund rises. Ensures you keep any gains you've made and also ensures you don't lose money once your stop price is set to above the original purchase price.
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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
@Steve Sapowsky where do you set your stop loss?
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Steve Sapowsky
Investor · Granby, MA · Member since 2015 · 70 posts · 15 votes
10y
@John D. I tend to follow stocks that are a little volatile. Therefore assuming the stock will move up or down. I try to get in at what I assume to be a low and immediately put a stop loss .01-.20 below the bid price. That way if I am wrong about the direction the stock is heading, I can still get out with minimal losses. However, if I am right and the stock jumps up .20, I cancel my stop and create a new one .20 higher. Then I just keep an eye on it. As the price creeps up, I cancel and create a new stop loss following the bid price by .05-.20. The closer the stop price is to the bid price, the more likely the order will fill and you will be forced to exit your position, hopefully with a gain. But then again, the higher the stop price you set, the better your chances of actually making some money. I hope that makes sense. Keep in mind, I am no financial expert. This just happens to work for me in many cases. I am not recommending any of this. This is just what I do.
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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
Appreciate the reply @Steve Sapowsky, I was curious as to your advice as to a stop-loss on an index fund. I know the stop-loss is a core tool for most professional traders, I am curious as to how those of us investing in index funds might use it.
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Gregory H.
Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
10y
I'm not in the business of taking losses. Yes each investment is a sunk cost, but all equity investments can have large short term fluctuations, and I have short term price targets that I'm willing to sell at even though I initiate an investment for the long term.
If MSFT is up 22% in 3 months and I have a limit sell order in place that executes when MSFT hits 25%, I'm more willing to lock in my return on MSFT while letting my T ride longer even if T happens to be down a couple % over 3 months because I know that T trades within a certain range, and I don't mind waiting a little longer while I collect T's higher dividend.
By the way, this isn't a hypothetical scenario, and MSFT is now down 10% from when I sold it, while T is now up 15% because I was able to keep it. With a large enough variety of assets, you don't need to time the market when harvesting cash, you just need to sell a few things that have become relatively expensive compared to the income they produce.
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Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
10y
Depending on the credit union, you don't necessarily have to be a resident to open an account there. I live in KY and have two credit unions I use in IL for their high-yield checking accounts. One pays 3.00% APY up to $10,000. The other pays 4.59% APY up to $20,000. Yes, you have to jump through a few hoops, but it's really not that difficult to hit the hurdles.
Above and beyond that, brokerage account. I like high-yielding stocks with relatively low betas. Qualified dividends to your face.
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Chris Soignier
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
Originally posted by @Gregory H.:

I'm not in the business of taking losses. Yes each investment is a sunk cost, but all equity investments can have large short term fluctuations, and I have short term price targets that I'm willing to sell at even though I initiate an investment for the long term.
If MSFT is up 22% in 3 months and I have a limit sell order in place that executes when MSFT hits 25%, I'm more willing to lock in my return on MSFT while letting my T ride longer even if T happens to be down a couple % over 3 months because I know that T trades within a certain range, and I don't mind waiting a little longer while I collect T's higher dividend.
By the way, this isn't a hypothetical scenario, and MSFT is now down 10% from when I sold it, while T is now up 15% because I was able to keep it. With a large enough variety of assets, you don't need to time the market when harvesting cash, you just need to sell a few things that have become relatively expensive compared to the income they produce.
It's your money, so you can manage it how you please, but it's irrational. The concept of sunk costs being irrelevant to investment decisions (aside from tax implications) is one of the core concepts I most vividly remember from getting both a BBA and an MBA in Finance. Let's put aside taxes, diversification goals, and transaction costs for a moment, and say you own 100 shares of XYZ corp. @ $10/share, total value $10K. You could have paid $5K or $15K for those shares, but regardless you should look at it as a $10K asset. What's the best use for your $10K looking forward from today? When active investment managers find an investment alternative that will provide a more favorable risk/reward in the future (w/in your risk tolerance), they rotate into the better investment. The reluctance to take a loss can be a costly mistake for unsophisticated investors.
https://en.wikipedia.org/wiki/Sunk_costs
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Gregory H.
Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
10y
@Chris Soignier Well minus the condescension of calling me irrational, unsophisticated and providing me the Wikipedia entry of sunk cost, I understand your point, but I don't think you understand mine.
I'm saying that diversity of assets affords you more options when the need to raise cash arises. I'm not opposed to taking a loss, but I'd prefer not to if I believe the security has strong potential over the long term vs. holding another security which I am close to hitting my profit goal.
If it turns out that the position is simply a weak one overall, then I have no problem cutting it loose & taking my losses.
It seems to be working out since my large cap value portfolio is up 25% in the past 6 months vs. 4% for the S&P500.
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Craig Garrow
OP
Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes
10y
Okay, so, I'm thinking the best thing I can do is split my free cash into reloading my "investment" account, and sticking the rest into a ROTH IRA. Still sort of kills me that someone else will be investing my money for me, though! Haha
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
I operate my entire daily business operations through a $200,000 home equity LOC. Money flows in and out daily. I never have "cash" savings.
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Al Wilson
Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
10y
Barclays. 1% is better than nothing. Good luck.
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Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
Craig Garrow An approach I learned from another investor, and now use myself, is to build a municipal bond portfolio and then borrow against the value for my projects. It's certainly more sophisticated (I don't mean that in a condescending way ... Just that there's many more moving parts compared to other suggested investments), but the net is that my money is earning between 3.9-5% while it's not working, is instantly available, and incurs no trading fees (so I can efficiently park small and large amounts). Net investment income is tax free and the principal and interest payments are close to risk-free. I think of the bond portfolio as a retirement account, and the line of credit against that portfolio as my own hard money lender that charges 2.5% and zero points. :) Depending on the amount of money you're dealing with and what sort of REI transactions you're making, it could make sense for you too.
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Craig Garrow
OP
Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes
10y
I LOVE the sound of that! Who does those? Companies like Fidelity?
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Chris Soignier
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
Originally posted by @Justin R.:

Craig Garrow An approach I learned from another investor, and now use myself, is to build a municipal bond portfolio and then borrow against the value for my projects. It's certainly more sophisticated (I don't mean that in a condescending way ... Just that there's many more moving parts compared to other suggested investments), but the net is that my money is earning between 3.9-5% while it's not working, is instantly available, and incurs no trading fees (so I can efficiently park small and large amounts). Net investment income is tax free and the principal and interest payments are close to risk-free.
I think of the bond portfolio as a retirement account, and the line of credit against that portfolio as my own hard money lender that charges 2.5% and zero points. :)
Depending on the amount of money you're dealing with and what sort of REI transactions you're making, it could make sense for you too.
Do they advance 50% of the fund balance, as they do for stocks?
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