Reinvesting Income Property Cash Flow

Abby Thomas · 2023-01-26T11:22:13-08:00

I am just getting started in the real estate space and doing everything I can to learn about acquiring and managing the right properties, and most of all, making my money work the absolute hardest. I am currently reading through "Real Estate by the Numbers" while listening to the podcast, and when we move family home's in the next year we will be keeping our current residence and renting it out (as well as seeking out other investment opportunities for long/short term rentals). In each metric scenario, J & Dave talk about the idea of reinvesting that money (since the earlier we get it the sooner we can take advantage of compounding & TMV). Sometimes he is even giving scenarios when considering opportunity cost in going forward with an investment and comparing it to an 8% return that he could be getting elsewhere. So here are my questions: 1. When taking on an income property, whether short-term or long-term, what are the implications/suggestions of what we are supposed to be doing with the monthly profits? It doesn't seem realistic to have constant new investment opportunities on a month-to-month basis, especially if part of the reason you are investing is the benefit of cash flow. Should it be going into the equity of the home? Into a high-return savings account until enough is saved for the next deal, be put into the stock market? HOW do you make those return $'s work hard for you while the property is doing its job of building your assets and appreciating over time? Especially to maintain the rate of return that metrics such as IRR imply. 2. Is the 8% market that the book is comparing properties to when making a decision referring to the stock market? So when in doubt about what to do with your $'s is that where they would suggest putting them? Help me understand! Thanks everyone!

Justin Hammerle

Realtor · Providence, RI · Member since 2022 · 404 posts · 262 votes

3y

Hi Abby - a lot to unpack here I would just simply say that what you do with your investment returns is entirely situational and dependent on your goals. I'm not sure there is a right or wrong answer, and If you are looking for returns there will always be risk to principal. With regard to the 8%, it sounds to me like this is just a general hurdle rate, whereas if you are considering an investment that is yielding less than 8%, there is likely a better deal out there - whether it be the stock market, real estate or VC.

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Lawrence Potts

Real Estate Agent · Member since 2018 · 459 posts · 414 votes

3y

Hey @Abby Thomas,

Great job so far! We can tell you are being intentional and disciplined and we love seeing you do your homework 👍

1. It depends on how much you need and how much you can save. But you are more likely to gain more capital faster through equity than cashflow. You can park it elsewhere but you’ll need to consider how liquid is it when it’s parked and ease of access to it (will you be hit with taxes/penalties if you need it to put back into another deal?). When you are new, you could throw it back into the home to force equity through rehab and repairs (ROI will vary depending on the current condition of the home, comparables, etc., but typically you can force equity through updates like adding a bedroom, updating a kitchen, etc.). But it doesn’t grow as much if you have a newer home that’s been remodeled and your extra payments on your mortgage go into your equity (principal paydown) only for you to see a 5% appreciation loss depending on your market and that money being washed away. Or if the extra updates do not translate to higher appraised value because comps do not support the ups grades. If that makes sense.

2. Idk if that’s what they’re referring to or suggesting but I think the answer is a little arbitrary in a sense…I think it’s whatever or wherever you can get 8%. Whether that’s a mutual fund, stocks, or even doing some private lending at 8% with points, it’s up to you. I don’t put any money in stocks or crypto. It’s too stressful for me since I don’t know it well enough. I only invest in what I know which is real estate.

Hope that answers your questions! These were great questions BTW! Keep asking away!

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Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

3y

Quote from @Abby Thomas:

When you buy an investment, the money it produces should sustain it forever with no need to put another dime into it. Any cashflow should be saved up and used to purchase the next investment. This will accelerate your growth and enable you to achieve goals faster.

My first investment earned me less than $2,000 a year. I kept saving up and buying more investments. Now I earn over $150,000 annually and I still save that money and invest it in new properties. I will continue doing that until I decide I am ready to live off the cashflow or do something else with it.

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Sebastian MarroquinPro Member

Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes

3y

Great questions: and questions that I have been asking myself for some time now.

I heard an investor I followed for many years ask someone :

Are you in a growth phase or stabilizing phase?

So, his point was for us to determine what our long term goals are?

Say for me is to first get to $10k of passive income per month. So, the next step would be to determine what asset will you choose for it (SFR's, Multi units, Commercial etc ) and once you choose your asset, then determine how many of them you need to achieve your goal.

Once you do, then you would purchase them asap. So if every SFR yields me $1k per month, then I would need 10 of those to achieve my first goal.

Then, you could pay them off as fast as possible, by paying the "oldest" one out of the 10 first, and once you pay that one off first, then use all resources to pay the second one and then the third... etc

(along the way, you will start getting more opportunities and you will will see equity rise in your investments). Your strategy may change as you become wealthier and you may choose a higher income goal, or a different lifestyle and you may choose to 1031 into different asset classes all together.

Some of the investors I work with put excess funds into stocks or lend it out as hard money to other investors, in aims to keep growing their cash and not just let it sit, then deploy it as opportunities present themselves.

Personally, I'm trying to invest as often as I can (once a year or once every two years), and what I have seen also, is that investments into personal growth have yielded way more cash flow than not.

I second people in other comments, in that it has to be a personal decision. You have to create your path, make decisions and align with them.

For me, I work in RE sales, so on commission, so having a strong emergency fund is important. My wife and me, invest 80% in Real Estate, always fixers and value add opportunities in CA for now, and always have about 12 to 18 months of emergency funds (that number will be lower as passive income grows). I personally like stocks also, so invest about 2% to 5% of income into stocks and also about 5% of income into a Roth IRA.

1. how's your personal consumer debt (reduce it if any)

2. how's your emergency fund and what would give you comfort if you lost your income?

3. How is your job security (w2 or business owner)

4. What are your goals and what asset class in RE do you like? (this may change over time and as you deepen your RE knowledge and experience).

5. 10, 15 to 20 years from now: what would be your ideal situation? and work towards that! :)

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Reinvesting Income Property Cash Flow

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