Where does all the money go?

[JD Morris]

I’ve been practicing analyzing properties with hopes of buying my first one in the next month or so. When I analyze properties, I account for vacancy, maintenance and cap ex (along with all the other expenses) but here’s my question: Where does that money go? Does it fall on me to separate that money out and hold on to it each month in order to save for those expenses? Or would that management company do that for me and then send me what’s left over each month? If it’s up to me, do you recommend setting up a separate savings account to hold that money in and separate it from my actual income?

[Lisa Foreman]

I've only owned rental property for about a year and a half. I let all the cash flow accumulate into a fund. I have paid any needed repairs (maintenance) and made the mortgage payment when a rental was empty a couple of weeks (vacancy) out of that fund. Now that the fund is big enough that I feel confident that I can cover any one or two large expenses that could come up, such as a new furnace, (cap ex), I felt comfortable making accelerated mortgage payments on one of my properties. I had this strategy in mind since I have an ARM on this property, and intended from the beginning to make extra payments during the adjustable period.

The point is, I think you should account for maintenance, cap ex, vacancy, and management when you decide to buy. You should not count on the money or treat it as your own until/unless you have an ample, comfortable level of reserves. Then you could choose to start to use any new cash that might come in for various purposes. You could accelerate payments if you are old (like me) or debt averse, or if you just like the idea of having a paid off property. You could save cash to invest in more properties if you are looking to expand your portfolio as rapidly as possible. You could reinvest extra cash flow in the stock market or in notes or in crowd-funding platforms. Or, you may be stuck with a money pit, and may need to spend every dollar and then some just keeping the property from falling down.

You should track your expected expenses and your actual expenses and compare them to see how you did year by year. The tighter your personal budget, the more reserves you might need to keep on hand. Or if you start with an ample level of reserves, you could decide to use any extra cash as soon as you get it and only save what you need to top your reserves back up.

Everyone has a little bit different strategy but I hope it helped to share mine.