What to do with all this cash flow???

8 Replies

My two partners and I are making about $1500 per month in Cash flow only deducting the mortgage. If we put 10% away for maintenance, repairs and vacancy, we're left with a little over $1200 per month. What to do with that extra money is a topic of conversation. We can:

1) Take the cash flow and split all of it 3 ways to help with our personal finances

2) Take no money out and aggressively pay down the mortgage over a few years (we owe ~$82K) to get it off our records, own the place free and clear and eliminate mortgage payment (P&I ~$412/mo). Re-invest in RE with the equity

3) Take no money out and accumulate cash reserves to re-invest in building #2

4) A combination of 1 & 2 or 1 & 3. 

My thinking is there's no tax benefit to paying down the mortgage principal and I could use the extra money ($400/mo) now to pay bills. But don't want to be too short-sighted.

What do we do?

Don't forget to account for insurance, property tax, vacancy, and cap-ex on the big ticket items which will eventually need to be replaced (roof, water heater, HVAC, etc). 

Assuming you and your partners have some time to go before retirement, I think #3 is the clear answer.  Reinvesting your returns is a hugely important if you want to increase your cash flow over time.  You should be plotting your course to position yourselves for making the next investment.

Medium sure dark blue   dark grayMike Hartzog, SureMark Capital Group

Sounds like you're getting a great return.  Well done.  I would hold off on pulling out the cash flow as long as you can.  Put it back into the business and let it grow.  Option 3 would be faster.  But option 2 would be safer.  I just depends on how much risk you can tolerate. 

Your big ticket items will bite you if you do that.  Houses are similar to heavy equipment I used to own.  New tracks on a dozer/excavator are about $24k.  It happens about every 2 1/2 years, whether you budgeted for it or not.

How long have you been having this great cash flow? If it's only been a few months wait and see what your true cash flow is over a longer period of time. You will have good months and bad months and it seems to me you are on a good run. Which only means one thing...something is about to happen! :). Repairs, vacancy, disaster, ect. In my 9 months of investing I have already learned this lesson. It's important to have cash reserves for these unexpected maintenance costs that pop up every once in while. For me it was a flooded basement thanks to the unexpected heavy rains in Indy. If all continues to go well and you are able to build a reserve. Then I would start reinvesting the profit. But make sure you have those reserves first. You just never know when a big ticket repair is going to come crashing down on you.

@Chidi Osuji It seems like a tough problem...all this cash flow!

This is a personal decision - or three persons decision as is true in your case. I agree with @Joey Noel however and if this cash flow is a recent 'problem' I would wait a while to let the dust settle. Time (and maintenance bills) are the true measure of cash flow.

The 10% for vacancies, repairs, etc is good but also need to handle cap ex. It will happen plus property taxes. I did not see that listed. As for strategy, I would build your reserve then option 3. It helps to diversify to reduce risk. Good luck

I would increase my cash reserves to more than you think you'll need then reinvest it via option #3. Since you are talking about paying bills with $400 it gives me the perception you don't have enough reserves in both business and personal. 

buy out your partners!  become the man!