So my property has a positive Cashflow, now what?

Question

Hello everyone,

We have all one end goal in mind and that is to create wealth for ourselves and our families.  Now that you have found a property that cashflows and you are seeking to build your small real estate empire, what is the best use of that extra dough on your first property.

Option 1 : Use it to buy more properties?  Really???  At 100$ for one door, let's do some simple math, it might be awhile before I can move on to the next purchase unless of course we get creative with financing but let's assume we want to keep it simple for now.

Option 2 : Pay down the rental properties mortgage FASTER...  Really???  The cost of borrowing is so cheap at 2,6% that I think I can make my money work harder in the long run.  However, the home would be free and clear sooner, allowing me to pull it's equity to buy more properties.

What do you guys think?

Landon Elscott · Answer

Currently, with only one rental property, I'm putting a huge emphasis on just getting sufficient cash reserves for both known and unknown repairs, vacancies, etc.  I have my eyes set on a second property in the "near" future, but I'm not necessarily in a huge rush.  I, personally, am trying to stay pretty conservative and not get over leveraged - I want to feel comfortable in knowing that if for whatever reason I hit a streak of bad luck, I'll still be able to make my payment obligations.  So as of right now, cash reserves is really my main concern.

That said, there are some other options out there where your cash can work for you and not make you feel like it's just sitting there in a bank account doing nothing.  Although the stock market can be pretty speculative, Real Estate Investment Trusts (REITs) are a way to get involved in additional real estate investing without necessitating additional loans and down payments, of course it is important to save up enough to buy in a lump sum that keeps your cost basis low even with the addition of a commission.  I find most of the REITs pay anywhere from 5-9% dividend yield, but again there's no guarantees as to capital appreciation.

Account Closed · Answer

@Jamie Montpellier

These are my thoughts and what works for me. Not saying "do what I do" but just offering this as ideas:

1. Together with your normal monthly savings aimed at buying new properties (see point 4 below), you are now add $100 to that amount. Put those savings in a place where you earn more than your current mortgage interest rate (2.6%) + inflation.

2. If you can't earn that much return on an investment, then do Option 1 and pay down your mortgage quicker. Once you've made the biggest dent you can in that mortgage, refinance it to reduce your monthly repayments even more and increase your $100pm for the door.

3. If you're making $100 for your first door, aim to do better on your second. I always use my last acquisition as the benchmark for my next acquisition.

4. I'm a supporter of the extreme savings method (google it, its a thing). You have to want to buy your second property more than you want all the things you spend your salary on every month. Analyse all your monthly expenditures. Figure out if you want your second rental unit more than you want cable, gym membership, a new car, etc and cull your expenditure accordingly. I worked my monthly expenditures down to 50% of my salary and I'm ruthless in my goal to sve money to buy more rental properties.

Joseph Weisenbloom · Answer

When you only have one property it is hard to have the cashflow from that one property pay for additional properties. That is why it is important to start with another source of cash (job, another business, etc) Once you have enough cashflow from your investments to fuel further investments you have reached critical mass.

Honestly I wouldn't pay down the mortgage because your money is earning at a higher rate in other investments than the interest rate. I wouldn't even save that cashflow for other properties. With only one property I would be more concerned with building reserves. Once you have a few properties you can start using the cashflow to buy new properties.

Curt Davis · Answer

Usually any positive cash flow goes into the bank account to cover maintenance or vacancy when they happen.

The idea of paying down the mortgages or using funds for more homes sounds great but not too realistic, at least from what I have experienced.

You might as well as save your money then try to pay the mortgage off faster to use for another purchase, why work towards paying off the mortgage only to pull out the equity then have another mortgage?

George P. · Answer

you should always do option 1. always.

you should find properties with more than $100 left over. that way you can do option 1 quicker.

So my property has a positive Cashflow, now what?

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