Reinvesting Income Property Cash Flow

[Abby Thomas]

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]

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.