How Do You Pay Yourself Owning Rental Properties?

15 Replies

Still working on getting my first deal and I know I've read and heard that you should always pay yourself first when taking your monthly income from tenants but how do you do it without getting nervous?  I know how to work the numbers but when you see that you're getting say for example $150 or $200 a month after all expenses of take-home income; do you actually just pocket that money monthly or save it for a rainy day for your rental property till the end of the year and then take the earnings for your own personal use?  Hope my question makes sense.  Thanks for your help!

Chuck,

I think that depends on what your goals are. I do real estate with my father, and we pocket everything and re-invest into new properties once we've amassed enough money again. I know others who use whatever cash flow they receive as spending money, or to help pay down some monthly bills.

Again, I think this is entirely up to your goals and future plans. Are you intending on buying more properties in the future? Are you looking to get into real estate to use the cash flow for some additional monthly income? There are so many different reasons people get into real estate, and its entirely up to you how you use the cash flow as long as the numbers work for you.

Best,

Aaron

My strategy is to take everything over $10,000 at the end of each month after bills are paid (mortgage is paid prior to the end of the month).

@Chuck Dangar If you are interested in scale, id take every free penny and place it back into your business. Make sure that before you start your journey you put a specific plan in place that maps out your goals and the path to get there, when you have a roadmap for yourself its easier to stay the course and it can shorten your time to your desired destination

You should always have a rainy day fund for your portfolio. 

But you should also be saving up that $200/mo and using that cash to invest into more and more deals to scale up your portfolio.

I used all my cash flow to build my reserve fund faster (along with cap ex and repair) when starting out.  This removes the nervousness.  Once you have "x" dollars in the bank its a non issue to pay yourself.  You know I have funds to cover stuff. 

I keep 5-10% for maintenance and CapEx after paying mortgage and take away remaining amount. This way, if there is a sudden expense; I can cover some or most of it.

At the moment we are building reserves and working on properties.  When I retire, SOON, God willing, We will be taking about 25-30k a year out divided up monthly, and leaving the rest for reserves and expenses.

I started with my end goal and worked backwards. Let's say your end goal is to earn $20,000 a month. 

Figure out how many units you will need to meet that goal and start acquiring. Set all your cash flow aside to invest in more properties. Adjust the number of units needed as you acquire new properties. Once you reach your goal, start paying the properties off starting with the smallest mortgage and working your way to the largest.

If a single-family home rents for $1,500 a month you would need 13.5 homes to meet your goal.

If apartments rent for $700 a month, you would need 28.5 units to meet your goal.

Personally, I'm buying multi-family because I can acquire more units, more bang for my buck, and less risk. I will continue setting aside cash flow to acquire more properties until I have around 30 units. Then I'll start paying them off and should be done in less than 10 years.

By the time I'm done, rents will have increased enough that I should be able to hire a property manager and still net over $20,000 a month while someone else does the work.

Hi @Chuck Dangar , good to hear that you are taking action!  

There are many ways to do this:  I will share the way I personally do it with my rental portfolio in New Jersey.  

I have a few bank accounts in order to keep things organize. It's easier to keep things organized if you run this as a business from day one.  There are several different type of software that could help you stay organize for little or no cost to you.

But yes, essentially I pay all the bills, including my share/profits on a monthly basis from my operating account and place it on a separate bank account. Technically, that is me getting paid, but normally I don't transfer those funds to my personal savings account till the end of the year, that is just personal preference as I don't need those funds to live the day to day. At that point we use the cash for whatever we desire, but normally is used to continue purchasing more real estate  :D ...  

In a perfect world, you should be allocating some cash for repairs/maintenance/vacancies and capex in order not to have any surprises when something breaks. Good luck and happy investing!

I never pay myself from the rental cash flow.  I save every penny for expenses, cash reserves (in case of an emergency like a new heat system or roof) and whatever cash is left over I save until I have enough for a down payment on another investment property.  For my own personal living expenses, I've got a job.

@Chuck Dangar

I do what @Derrick E. does. I have a part-time job and my wife has a full-time job. I handle the rental maintenance and most of converting new purchases to rentals. But we are weird immigrant people (I am Greek and my wife is Russian) and this makes sense to us. We don't have a life here and we don't want one. We have a retirement goal and a plan to give our money away.

The best advice I ever heard on starting a business was from a motivational speaker a very long time ago. Imagine that you want to start a corner convenience store. You run your numbers, and you calculate that you can live on 50% of what you make while investing 50% back into the store and still be profitable. So that's what you do, year after year, maintaining your corner convenience store.

Now imagine after ten years of running your store, a Korean family buys a building down the street and also sets up a convenience store. They live three to a bed above the store. They save every last penny and put it back into the business. You can smell their cooking every night from down the street, see the shadows on their curtains as they munch down their food upstairs when you lock up for the night to go home to your mortgaged-to-the-neck castle in the 'burbs, or go out with your wife, or maybe take that two-week vacation to see Florida Mickey with the family...

Which store do you think is going to run the other into the ground?

I think you'll find that a save vs. spend attitude prevails in real estate, no matter who's doing it and how they're doing it. We all seem to turn into dirt-cheap savers if we've been in it for a while. I've reached the point where I can't even look at a late-model sports car being driven on the street and not laugh. After you know you can buy that car and the guy driving it more than a few times over, you have a wholly different appreciation of how capital works and what it's most useful for in the world.

I put away money for CapEx, maintenance, and taxes first. After that, I take cash as needed to pay everyday expenses. Last year I replaced two roofs, three water heaters, flooring in two units, paint in two units. Must be prepared to keep them up. Letting your properties deteriorate will result in lower tenant quality.