What Is The Best Use of Real Estate Cash Flow?
As you get started in real estate investing, you’ll hear a lot about the importance of reinvesting cash flow back into your business. This can mean different things to different investors. If you intend to retire with enough income to maintain a specific lifestyle, you may want to consider reinvesting cash flow back into real estate.
Here are 7 options to consider as you consider how – and where – to reinvest your cash flow.
1) Build a reserve account.
First and foremost, use extra cash flow to build a reserve account for property-related expenses. Most experts recommend a breakdown as follows: Budget 20-35% of available cash flow toward unforeseen expenses, such as HVAC, roof repair, windows, and other capital expenses. Then set aside 10% for a vacancy; that way, you know you have funds to cover your principal, interest, taxes, and insurance when there’s a gap between tenants. If you work with a management company, you’ll want to set aside 5%-12% to cover their charges.
Once you’ve safeguarded six months to a year of expenses, or up to 1% of the home’s value, you can focus on building other savings accounts. Start this practice with property #1, and keep it up as you buy additional rental properties.
2) Save for down payments on future properties.
As you start growing your cash flow from your rental property above and beyond the reserve fund, you create an opportunity to save money for the next down payment. Your rental income can position you to buy more rentals and put you further along the road to financial freedom.
Saving up cash flow for reserves and then a down payment for another property will keep your current property operating well and give you the ability to scale your portfolio.
3) Invest In Real Estate Investment Trusts (REITs.)
REITs offer an investor the ability to invest in real estate without actually owning or managing any physical property. Instead of buying rental properties, REIT investors purchase shares of companies that invest in real estate, similar to a stock purchase. High-quality REITs may earn 6-8% yields and produce consistent growth, and often pay high dividends.
4) Pay off mortgages faster.
Paying down your mortgage on a rental property is an excellent use of cash flow if you are not considering purchasing more property. When you pay off a mortgage, you gain total control over your rental and no longer have a recurring interest expense. Plus, you won’t have to worry about ups and downs in the housing market, and possible interest rate increases. And once you’ve paid off the mortgage, you have more discretionary cash flow to put to better use.
5) Invest more in improvements and renovations.
Making updates and improvements to a rental property can often be a good place to invest your cash flow, especially if doing so allows you to increase rent. Before making any significant improvements, you will want to double-check comparative rents in the neighborhood with a rent evaluation tool like Rentometer. Doing so will give you an idea of the current market rent range for a property like yours. You can drill down into the report to see amenities and descriptions for similar properties and determine if the cost of updating and upgrading is worth the likely return.
If you reinvest your capital on improvements, you may come up a bit short over the immediate term, but keeping good tenants happy and in place allows your property investment to continue to grow.
6) Become a private money lender.
If you have managed to accumulate a significant amount of residual income, you could become a private money lender. You can lend your cash flow to other investors for real estate purchases and potentially net returns as high as 12%-15%. This form of asset-based lending holds the property as collateral to secure your investment.
7) Fund your retirement.
As you work to build and grow a real estate portfolio over time, your cash flow could eventually fund an attractive retirement lifestyle. With rental properties that produce consistent cash flow, you can avoid worries about economic fluctuations that rattle most investors in stocks, bonds, and 401(k)s.
Are you intent on building long-term wealth to supplement retirement? Give strong consideration to reinvesting your profits from real estate into additional real estate opportunities.
If you’re more than ten years from retirement, now’s the time to save for a down payment to buy your first rental property. If retirement is five to ten years out, or even if you have already retired, look for opportunities to convert assets in lower-yielding investments into rental real estate and increase your monthly retirement income.
As a real estate owner, you gain both tax advantages and financial security, with the overall benefit of creating additional cash flow to support your lifestyle today and in retirement. When you first start investing, it may be tempting to take your cash flow as income now. If that’s the case, make a point to revisit your goals for investing in real estate. Make it a priority to reinvest in one or a combination of the above options to stay on track to reach your goals.
This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology.