Using Your Cashflow to Live

[Justin Hertzog]

Since I've started investing in properties I have never used the cashflow to pay myself for anything.  This is mainly since investing isn't my full time job and I don't need that income to survive.  I would just let the property build up a little bit of reserves and then also put more towards possibly paying it off faster.

However, I'm switching gears and trying to become more of an investor full time, gain financial freedom, and start using that income to live.  Do a lot of you do this?  Obviously when we buy deals we analyze the cashflows based on everything we can think of.  I'm just curious for those of you that are living off of your rental income, what type of things I should be thinking about before switching over to this.  For example, how much do you typically save for reserves, any rules of thumb you consider for how much to take from the property?  I know this may seem like some dumb questions since we all buy and hold properties to have that financial freedom at some point, but it's a total change up from what I've been doing, so I'm just trying to wrap my mind around it.

[Austin Fruechting]

It's an economies of scale thing... the more properties you have the less variance there will be. When you have 20 units, there will probably be a time when a lot happens in the same small window of time. If you have 200 units you'll always be closer to the long term average.

I like to describe it like this:

For buy and hold the amount of reserves you need goes up as you acquire more, but then reaches a tipping point and starts going back down when you have a lot (or it at least flatlines).
Think of every property as a dice and you roll them every month. Let's say 1 is major expenses. 2 is moderate (above average) expenses. 3&4 are average. 5 is very minimal (below average) expenses. 6 is no expenses. Over the long haul, with enough rolls, you will average to 3.5...
If you have 10 rental units it's very possible on your roll for many of them to come up 1's and 2's (maybe with a 1.8 overall average). That month is going to be brutal and you need the reserves to cover all that... and that can happen multiple times in a row.
But over the year with 12 rolls (120 total dice rolls), it will come out pretty close to the 3.5 average... So if you have 120 units, statistically it will hold much closer to the average every single months. You don't need to keep scaling reserves at X dollars per unit. I actually think you need higher reserves at 20 units than you do 200. I average one HVAC system every other month, but it doesn't matter because that's the statical average. I have enough units so I roll enough 5's and 6's to pay for the 1's and 2's.