Best use of my cash flow?

Question

I’m just getting started researching real estate investing and I always hear people talking about reinvesting their cash flow back into real estate. I’m just wondering what some of options are in this category.

Would you use it as down payment on more properties?

Could you use it to pay off mortgages quicker?

Do you start rehabbing nicer to get better rents?

Marco Bario · Answer

Great question @Dylan Short -

It's great to reinvest your way to prosperity and financial independence. But also consider risk and your personal situation.

A few questions:

If you're using leverage (debt) to buy assets, what would happen if those loans were called all or in part? This can happen due to market correction or extended loss of a tenant.

How many months can you make your debt payments without income?

Where do you believe we are in economic and market cycles, and how do you protect against negativity?

How diversified is your portfolio? Do you hold any non-correlated assets?

With success, this type of portfolio risk management will be important. The old saying "bulls make money, bears make money, pigs get slaughtered" applies beyond Wall Street.

But you say you're getting started. Get your first deal done, and do so cautiously. I would worry too far beyond that yet.

Good luck!

Brett Sayers · Answer

@Dylan Short

Keep in mind that some of your “CashFlow” needs to be put aside for Management Vacancy and Repairs (MVR). While earning $200-300 beyond your Principal Interest Taxes and Insurance (PITI), my MVR reserves never truly hit my bottom line. At least 20% of the rent goes towards MVR.

That is a low percentage as well due to self managing. A good idea is to budget 30-35% towards the unforeseen expenses like a new HVAC which you’ll have to repair or replace (I’ve had 3 this year), or the random dishwasher or water heater that quits on you. That will also push you to find better deals if you don’t count the reserves as “Cash Flow”.

Reinvesting that capital may short you a bit in the immediate term, but keeps very happy tenants and makes sure your investment is going to continue to grow.

The rest can be put somewhere to buy more properties in the future.

Jared Maches · Answer

@Dylan Short When you start earning cash flow from your rentals you would want to have that money go towards a down payment. This will help you earn your financial freedom. You want your rentals buying you more rentals! Yes, you could also use it to pay down on some properties but if you’re just starting out I suggest you put the cash flow towards rentals so you can scale faster. Lastly, depending on how out dated your unit is you could update it but that would depend on the comps in your area.

Best of Luck

David Richter · Answer

Nice to meet you @Dylan Short,I personally would use the saved up cashflow as a down payment for another property. That gives you the ability to scale your portfolio faster.

Marco Bario · Answer

@Vee Dee - I don't know what the rest of your financial profile looks like so it's hard to answer.

First, I assume you have sufficient emergency savings before investing, especially in something which probably has limited liquidity and could result in a loss of capital.

If you have a small portfolio without a great deal of diversification, I would recommend investing distributions from the note fund elsewhere to manage risk. There's also something to be said for holding a cash position in times of uncertainty such as the current environment.

If you already have diversification across asset classes, geography, correlation, etc - chances are we should be asking you the question you're asking us ;)

Good luck!

Brett Sayers · Answer

@Vee Dee

I use LendingClub as a P2P investment vehicle. This may be different than what you are talking about but bear with me. Originally I tried it as an experiment to see how well it worked. Almost 3 years later and it’s throwing off 10-14% returns. I’ve decided to keep it as a hedge for if my job disappears for some reason. The payments each month are reinvested with my investment contribution. I estimate that it will feed itself double my initial monthly investment by year 4 and I can let it go ahead and grow on its own.

I’m no note guru, but it was a great way to get going with notes. The ultimate goal being to get out of unsecured debt and into something backed by property. I just don’t have the bankroll yet to buy a primary or secondary yet.....YET.

Vee Dee · Answer

I am just getting started in note investing and similarly have that same question as it pertains to investing in a performing note fund that pays a few hundred dollars of interest monthly.

Should I save the monthly payouts for reserves, accumulate the monthly payouts to then invest a lump sum of them into another note fund or reinvest back into a larger position in the fund from whence they came?

Best use of my cash flow?

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