How to Grow My Money While Build Up for the Next Deal

13 Replies

My wife and I started learning about real estate in January of 2019.

In June of 2019 we purchased our first primary residence and converted the basement into an 2 bed/1 bath apartment which we started renting out in August of 2020. This property generates $900 of rental income monthly, which almost pays our mortgage and allowed us to start saving up for our next deal.

In April 2021, we purchased our first rental property. It is a 3 bed/2 bath single family home with a 1 bed/1 bath ADU. When renovations are complete, This property will cash flow $750 monthly, which is a home run first deal for us if everything goes according to plan. While we intend on refinancing this property this year, we believe that we won't be able to pull 100% of our cash out of this deal, which is okay for us, but just means that we aren't going to be able to roll right into our next deal.

So theoretically we should be generating $1650/monthly that will eventually go into investing into our next property.

My question is this - what would you do with that money while you allow it to build? Would you find a high interest savings account and let it sit there? Would you find a total market index fund and let it follow the market for 12-24 months? Would you invest in a REIT?

Just looking for ways to make my money work for me while I am waiting for my next opportunity.

Hi Nathan, I have grappled with this question as well and many people I've spoken with/podcasts/books have different opinions on what's best. I think it's all based on your risk tolerance and timeline.

I think it depends how much you are looking to build up to put into your next property and how quickly you can do that.  If you're looking to make, say, a 20% downpayment max then it may not take too long to save up the cash (depending on your purchase price of course) in which case a money market account may be the best move.  

However these days with talks of rising inflation keeping cash could also become a risk. 

Here's what I do - and I am by no means an expert - I purchased my first property in November 2020 and am actively saving for my next.  Initially I started putting every bit I've saved into an S&P Index Fund and various stocks.  Now I am gradually shifting into cash and hope to have about 50/50 between cash and investments when I start actively looking again.  Ideally my plan would be to use all of the cash and some of the investments to purchase the property.

I hope this helps - I always love hearing how others approach the issue.  

@Nathan Faucett Congrats on the success with investing. It sounds like your approach and speed for REI is very sustainable.

I have a similar issue holding money right now. Savings accounts suck and so do CDs. The interest rates are so low right now it's a joke. It was just a few years ago I was holding cash in 15 month CD at 5% interest; today my bank is offering a 0.5% on the same term. I decided to stick most of my money into the stock market. Wish I would have dumped more into it after the pandemic scare. I'm investing in ETF's and utilities companies. I like high dividend paying stocks but it doesn't make much money. 

Inflation is going to hurt all of us if the government keeps printing money. It's already killing would-be home buyers since the institutional buyers are grabbing everything up. I agree with James to shift investments towards a 50/50 split. I should probably focus on that my self. Having some liquid funds for a future DEAL is the smart move if you ask me. 

@James Babin and @Jaron Walling - Thanks for taking time to reply. I'm toying around with a lot of different ideas right now. Here are two of them.

Max out our 401k contribution: Right now my wife and I contribute to match our company 401k/403b contributions and using our rental income as the source for our next purchase. I don't love this for the reasons that I mentioned above (typical savings accounts stink, stock market is volatile, etc), but it does allow us the greatest amount of flexibility with our money. I'm thinking about turning this concept on it's head - maxing out our 401k/403b contributions and using our rental income to pay our bills. The reason I like this idea is because I am reducing my taxable income AND I can take 50k or 50% of my money out as a loan (whichever is less) as a tax free loan. So theoretically, I could benefit from that concept of a long time horizon but I'd also have the flexibility to use my money now if I needed it. AND if I decided at a later basis to leave my company (or I lost my job for some reason), I could roll this money into a self directed IRA and start using it to buy property or hold notes or whatever I want.

Prize based savings account: 2 Prize based savings accounts recently came out on the scene (Yotta and PrizePool). These savings accounts get 0.2% and 0.3% annual interest, respectively. This is great because it's a better interest rate than I was making in my money market account at my local credit union. However, on a weekly basis you get entered into a lottery or a drawing (respectively) to earn a prize greater than that base interest rate. I'd be happy to explain more in a private message if you are interested in learning more.

Have either of you thought of these options? 

@Nathan Faucett I have heard of Yotta but not PrizePool.  That's an interesting concept, I would be curious to know the % odds of getting a prize would be! But I guess if the interest rate is better than a money market then there's no downside in that arena. 

I don't know anything about loaning from a 401k but I have had some friends do that to buy their primary residence I believe. My company uses a SIMPLE IRA plan and I'm not sure if those plans have the same capabilities. I suppose it's a powerful plan if 50k is the max you would need to your next purchase, or if you mix it with other cash savings/investments. What are the rates and terms like for a 401k loan?

@James Babin  

For PrizePool they have a defined number of prizes and you can only win one a week. So it depends on how many "tickets" are in circulation. As time moves forward, it will get tougher to win prizes, but early adopters are able to get prizes pretty easily. But the base interest rate is 0.3% APY, so that's a bit better than Yotta.

For Yotta, they tell you what the odds of winning their prizes are on the rules page. They don't look great initially, but a study I read assumes that it will return about 2% APY on average.

You actually are just paying yourself interest with a 401k "loan" (based on what I've read). I think the rates are around 3.25% for a 5 year term, but it probably depends on your plan.

Let me send you send a PM. I have several links to share, but I'm not sure they will go through on here.

@Nathan Faucett how long do you plan on holding the money? It takes DECADES for interest to compound and make any difference.

I just leave savings in a dedicated checking account.

2 hundredths of a Percent interest for 15-20 months doesn’t really matter-I avoid the stock market personally, right now, because I feel there is a high risk of a correction and low reward of increased value of the account due to market appreciation.

Originally posted by @Nathan Faucett :
"...I'm thinking about turning this concept on it's head - maxing out our 401k/403b contributions and using our rental income to pay our bills. The reason I like this idea is because I am reducing my taxable income AND I can take 50k or 50% of my money out as a loan (whichever is less) as a tax free loan."

I like this.  This is an interesting idea in my opinion.  I am in a position where I need to reduce my tax burden for the next couple of years.  This will allow me to get rid of income pre-tax, but still pay bills. 

In other news, I believe Amex's high yield account is at 0.40%.  It's hardly ground breaking, but better than many places, and you can access your cash anytime, since it's a Savings Account, not a CD.

@Christopher B. - Thanks for the feedback man. I'm still doing research/analysis to see if this is the best option for my family, but an initial investigation showed $5k of tax savings per year if my wife and I both maxed out our company retirement accounts, which is not insignificant.

@Max T. - I see that you said that you would do Crypto. I'm in the initial investigation stage of trying to understand StableCoins like GUSD that can be held in a Gemini Account and earn 7.4% in interest. Have you looked into anything like this, or are you talking about something else like Bitcoin or Ethereum or some other lesser known coin? I'm not looking into getting into anything super volatile. While the idea of getting rich quick is appealing, it feels like it unlikely for me and too risky for my family.

Have any of you looked into stablecoins? If so, do you have any resources that I could look into to do my own research?

Originally posted by @Nick Barlow :

@Nathan Faucett how long do you plan on holding the money? It takes DECADES for interest to compound and make any difference.

I just leave savings in a dedicated checking account.

2 hundredths of a Percent interest for 15-20 months doesn’t really matter-I avoid the stock market personally, right now, because I feel there is a high risk of a correction and low reward of increased value of the account due to market appreciation.

That's my view as well.

 

@Nick Barlow and @Eric James - I definitely understand that point of view and one of the financial advisors told me something similar - basically that it was contrary to my investing strategy to invest in something as risky as the stock market for a short term time horizon.

Theoretically, I would love to reinvest the earnings on this money in 12-24 months. My plan is to do a cash out refinance of the property that I'm currently renovating. Depending on the market at that time, that could just pay off my current note or it could put me in a position to pull all of my cash out immediately (or more). If I had another $35 to work with right off the bat (my investment in the property that I'm currently renovating) and 6 months of success under my belt, I would plan on deploying my funds again as soon as possible.

So for anyone that reads this in the future - I've done some more research and what I've found is that my 401k strategy, while it does have some advantages, is not something that I think it is going to work for my family at our income level. 

If we had a higher effective tax rate (maybe like 20% or so), I think that this strategy could work, because you are reducing your taxes dollars so significantly. However, for us, while this strategy would increase our net worth by decreasing our tax dollar paid, it reduces our investing fund in such a way that could be detrimental to our investing strategy.

Additional Drawbacks include:

Less Flexibility - By putting our money into our retirement accounts, aside from the loan that we could take, that money was pretty much locked up

Higher Risk - In this scenario we were relying on our rental income to pay our bills. If one of our renters stop paying or we have some sort of emergency, we are unable to respond to those problems as quickly.

I would be happy to provide more specific dollar amounts and share the excel tool I've built to analyze this data if anyone is interested. Just send me a private message.