Cashflowing, or am I kidding myself?

Question

So we bought our first rental property a little over a year ago. We didn't really know what we were doing, but watching a ton of money sit around earning 0% in our savings account for 5+ years was killing us and we needed to do something. So we bought a townhome, touched up some paint, rented it the first week, and the tenants have been great. We collect about $200/mo more than we pay for the mortgage + HOA + taxes + insurance, but I suspect the property isn't really cashflowing... we didn't take anything into account like vacancy, repairs, capex, etc.

Should we be putting away money each month into a savings account for those long-term items? So far I've just been putting it all towards paying off the principal. Originally we put 25% down, but We have probably paid off another 25% in the 14 months we've owned it (obviously not just from that "cashflow"). My gut told me the right thing to do was to buy a property, get it rented, pay it off as fast as possible, then move on and buy another. That has turned out to be a slow-burn strategy that feels overly conservative.

I have basically zero education/training, so now I'm here, trying to figure out some better methods. I think I learned more about REI during the webinar today about multifamily properties than I have learned in my life up to this point. I've obviously got a lot to learn, but I'm excited to be doing it.

I'm living in northern Utah County and have sat in on one of the UVREIA meetings. I don't think I understood much of the meeting, but maybe I should keep going? I used to think I was somewhat smart, but I realize now there's a whole world here that I know basically nothing about. If nothing else, it's going to be an interesting ride.

James Talbot · Answer

Thanks for the advice. But is it really cashflowing? The calculators here seem to say that it's not really cashflowing because I'm not saving anything for those longer-term expenses. I'm starting to feel like, although I'm getting cash out right now, I'm setting myself up for negative ROI in the long-term when those other expenses eventually hit (new water heater, garage door, etc.). I guess we'll find out when we find out.

Jason Leavitt · Answer

Good advice above from @Habbak Burs.  You are building wealth through the pay down of your mortgage and likely appreciation depending on your market. If you’re comfortable with your monthly cash flow then just keep doing what you’re doing, or refinance as suggested while rates are still low and you can gain more monthly cash flow. Either way you’re growing your network in the long run which will give you great options in the future. The thing about the slow burn strategy is you can just leave it on auto pilot and then one day you’ll find you have lots of options with the equity you have built up.

David Morehead · Answer

First of all GOOD FOR YOU!!!!! Better to jump in than let your money sit around. Get those dollar bills out there working for you.

Based on what I read I think I would re-finance and get another property and rinse and repeat. Its better to have 10 properties that cash flow 100 a month than one property you own outright that cash flows 1000 a month. Don't forget the more you have the better your appreciation, tax write offs, and net worth.

Everyone is different and every scenario is different. But buying one, fully paying it off and then moving to the next is a very slow and ultra conservative route. I would recommend reading the BRRRR method book. Usually the time if would take you to fully pay off one you could have bought many more. All things being equal its usually far better to own 10 percent of 10 properties than 100 percent of 1

Habbak Burs · Answer

@James Talbot

That’s awesome you got your deal.

Based on your # you are not cash flowing once you factor in your expenses & also if a repair were to happen it could take out your cash flow.

However, it depends on your property if it’s new or newer construction then you won’t really have repairs unless the tenant is really rough on your property. But if it’s older then you will need to start setting money aside.

I like your idea though to pay it off because then you can set a side your maintenance, cap x, etc and still cash flow, which is awesome.

The other thing if you already paid down 50% maybe you can refinance (don’t take cash out) and have lower payment in which you can set a side your expenses & cash flow.... then maybe you can move on to #2.

Right now you aren’t really cash flowing but if you can pay it off in the next year or so then you should be able to cash flow really well. And don’t forget if the area is appreciating in value you can sell down the line and gain that return.

Not an expert, just my opinion

I have a unit now that isn’t cash flowing I’m actually $50 negative but I’m going after appreciation in that area buy & hold for 5yrs and I can afford that right now.

For my next deal I’m focused more on cash flow of $100 - $200