Using Your Cashflow to Live

General Landlording & Rental Properties
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Using Your Cashflow to Live

Justin Hertzog
Investor · Winsted, MN · Member since 2017 · 8 posts · 3 votes

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.

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Austin Fruechting
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
8y

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.

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  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    @Justin Hertzog If you had a guaranteed income that totally supported your desired lifestyle and adjusted with inflation, you wouldn't NEED to work or save for the future, right?

    If you want to go full time either your rental income (after all immediate and amortized expenses) would either have to equal this, or you would have to adjust your lifestyle lower so that you could save, be able to survive now, and grow into your goal.

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  • Nathan Platter
    Real Estate Agent · Minneapolis, MN · Member since 2016 · 361 posts · 296 votes
    8y

    Hey @Justin Hertzog ,

    I aim to keep 3% of Property Value as my constant rental reserves. Some investors earmark 5-10% of rents for Capex/improvements, I prefer a stagnant account.

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  • Justin Hertzog
    OP
    Investor · Winsted, MN · Member since 2017 · 8 posts · 3 votes
    8y

    Thank you both.  That definitely does give me something to think about in terms of reserves and such.  I was going to keep 5% of rents for capex and improvements also.  I think the biggest part for me right now is grasping to actually use the rental income as a means to live since that isn't what I've been doing for the last 3+ years.  I work with some investors whose goal is to pay the buildings off as fast as possible and maybe some of that just rubbed off on me too, but now I'm looking at the long term.  Enjoying the cashflow now and letting it pay itself off over time.

    I was more or less just curious how many others were doing it either way.

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    I’m far from financial freedom, probably 12-15 years. That being said I would just earmark 10k or so per property and set that aside. That’s your capex and repair reserve. By time I go fulltime most my properties will be paid off so the risk will be minimal
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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Justin Hertzog:

    Thank you both.  That definitely does give me something to think about in terms of reserves and such.  I was going to keep 5% of rents for capex and improvements also.  I think the biggest part for me right now is grasping to actually use the rental income as a means to live since that isn't what I've been doing for the last 3+ years.  I work with some investors whose goal is to pay the buildings off as fast as possible and maybe some of that just rubbed off on me too, but now I'm looking at the long term.  Enjoying the cashflow now and letting it pay itself off over time.

    I was more or less just curious how many others were doing it either way.

     If you plan on living off your rental properties you need to have a very healthy cash balance somewhere or easy access to liquidity. Things are going to break and go wrong, and you better be able to stroke a check when necessary. I make enough from my portfolio that I could easily stop going to work (I like my job) and I'd have lots of cash left over. If I decided I was going to do that - and I am going to do that, at some point in the not-too-distant future (I'm almost 50 after all) - then my benchmark is at least several thousand dollars "clear" each month beyond all of my living expenses, such that my bank accounts continue to grow even without going to work. Other people find that the equilibrium point is good enough for them - they make $3000 clear in rents, they have expenses of $3000, time to quit going to work. If I was going to do something like that I'd make sure I had 6 figures+ in accessible cash to pay for all the stuff that's going to come up, and I'd have some kind of side hustle to bring in the extra dough to pay for stuff that falls outside of your expenses. All the stuff you don't think about, like the car deductible in an accident, the extra trip to the dentist, things like that. 

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  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    8y

    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.

    3Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y
    Justin Young I’m shooting for 10k a month passive. I try to determine when I will be on that track if I continue to get modest 15-20% ROI year after year. Im not quite there but will be in a couple years. Now is the time I say to myself who cares if it take 3-4 years.
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