How do you "pay yourself?"

25 Replies

What do you guys and gals do with your cash flow?

How much do you have in reserves before you pay yourself?  Do you have a formula?  Do you pay off quicker?

Just curious how others use their money.

Originally posted by @Andrew Merriman :

Great question...

Even if you want to speak in general terms and not specifics to yourself this would be helpful for new investors.

 That was my thinking too...esp me lol

Talk to your accountant about how to do it. When people say put it back into real estate deals if they are not paying taxes on the gains from one to the other and Uncle Sam ever comes knocking look out.

For me it will depend how stable your asset is. If the property is a brand new build I would have next to no reserve. If you bought a property and you estimate the roof and mechanicals need replacement in 5 years I would divide the replacement cost by 60 months and contribute that amount per month.

I keep three months of gross rent for capital reserves.  This does NOT include reserves that accumulate throughout the year for taxes, insurance, maintenance, and management.

Once I reach the three month amount, 2.5% of gross rents are added to this reserve every month.

Anything over and above that gets used to pay down my line of credit, which I will then use to buy another property when appropriate. 

Note that I am paying down debt in the LOC, NOT the mortgage - since that debt is illiquid and I gain the benefit of paying that "years old" fixed and amortized loan with inflation-buffed 2018 dollars.

In short, I do not pay myself at this point, as the lure of compounding is too irresistible for me.

I think for me I am going to build up "worst case scenario"  which would be roof.  When I have hat in reserves Ill start using that cash flow for something else

Originally posted by @Joe M. :

Is there a certain percentage people leave in reserves?

 It really depends on the person, how easily they can access cash, etc. 

Some people do a lump sum per door, others do a set amount overall (esp with more doors) some don't do any if they have the income/equity etc to cover it with their w2 jobs.

I'd recommend around 4 months rent in reserves as a general guideline

Originally posted by @Alan Fitzpatrick :
Originally posted by @Joe Marshall:

Is there a certain percentage people leave in reserves?

 It really depends on the person, how easily they can access cash, etc. 

Some people do a lump sum per door, others do a set amount overall (esp with more doors) some don't do any if they have the income/equity etc to cover it with their w2 jobs.

I'd recommend around 4 months rent in reserves as a general guideline

 Thanks Alan

I'm currently keeping $5-6k in reserves for my duplex. However, this duplex has a 4 year old roof, and the entire HVAC for both units isn't even a year old. So, I don't expect high capex in the near future. The rest of the cash flow is set aside in a brokerage account to accumulate for another multi family purchase. I don't plan on paying myself any cash flow until I retire because I have a good W2 job. 

Originally posted by @Anthony Wick :

I'm currently keeping $5-6k in reserves for my duplex. However, this duplex has a 4 year old roof, and the entire HVAC for both units isn't even a year old. So, I don't expect high capex in the near future. The rest of the cash flow is set aside in a brokerage account to accumulate for another multi family purchase. I don't plan on paying myself any cash flow until I retire because I have a good W2 job. 

 Thanks for the great answer

For everybody holding money in reserve, are you holding it in a savings account, investment account, etc? Seems like if I had a couple thousand dollars, I could hold it in a low risk investment account until needed to further compound my savings. 

Originally posted by @Joe M. :

What do you guys and gals do with your cash flow?

How much do you have in reserves before you pay yourself?  Do you have a formula?  Do you pay off quicker?

Just curious how others use their money.

I have an LLC set up and I pay myself what they call a "reasonable salary" once a month. In the LLC account I keep vacancy, Cap ex, standard repairs.

Originally posted by @Ben Sears :

For everybody holding money in reserve, are you holding it in a savings account, investment account, etc? Seems like if I had a couple thousand dollars, I could hold it in a low risk investment account until needed to further compound my savings. 

Mine is in a business money market account at the bank.  The purchasing power of that money slips a bit backwards over time, but it's not there as an investment, and I can put my hands on it at a moment's notice without much fanfare.

I agree with Wesley. Keeping it in a "safe" investment account doesn't sound safe if it has a stock aspect. This is money that you may need at short notice some time and so it should never be kept in a volitile place. Savings/money market accounts let you tap it at a moment's notice. As for amount, I go a little conservative and keep $10K in cash. After that it all goes to the "next house fund" or paying off the HELOC.

@Brian Barfoot I can access my Brokerage account and have money within 2-3 days. When has anybody ever needed a large sum of money before 48 hours? Bail money? Credit cards could actually work if you were desperate for a couple days. My money is working for me, and not just in real estate. Are stocks risky? Of course. But not since 1929 has anybody lost that much money in one day that you have to worry.
Originally posted by @Anthony Wick :
@Brian Barfoot I can access my Brokerage account and have money within 2-3 days. When has anybody ever needed a large sum of money before 48 hours? Bail money? Credit cards could actually work if you were desperate for a couple days. My money is working for me, and not just in real estate. Are stocks risky? Of course. But not since 1929 has anybody lost that much money in one day that you have to worry.

The problem is that when you would need the money, it will be when the market just took a 15% dip and you won't be able to wait for it to go back up.

In my view anything that you can't keep for more than three years, should not be in stock.

All short term (less than 3 years) liquidities are back in my HELOC. That's much less % to pay that the few cents that I could get in a savings or money market account.

@John W. So you pay down your principal? Or are you saying you have an open HELOC, wIth balance, at all times that you’re paying on?

@Anthony Wick I have a HELOC that I use like a credit card with a balance on it from buying a property and every extra dime goes towards paying that down and saving interest. When the balance gets low enough then I feel like I'm freed up enough to purchase more property. I find this to be one of the most motivating and satisfying ways to earn and save.
I free up money any way I can and put it towards the balance including electing 9 dependents so I'm not taxed as much throughout the year, taking out 2.5% APR car loans on paid off vehicles, borrowing against 401k, and making deals with friends and family and paying them a little lower than my HELOC's APR to "rest" their money in my account.