Previously, I wrote about the cartoonishly low interest rates we’re currently loving. In this post, let’s explore what we might do with the tax-free cash we just took out of our home and/or investment property. Where’s the best landing spot for all that cash—or is there even one?
After over 50 years being licensed—mostly as a broker/owner—allow me to share some of what I’ve learned in that time. Here are a few points that I consider golden rules.
Knowledge: We can’t get the answer to a question we simply don’t ask.
Strategy: Everyone has their favorite. For most, a combination of thoughtful strategies has proven to be infinitely more productive than the one golden strategy—whatever that may be.
Expertise: A fancy word denoting that a person has the ability to do certain things at the expert level of execution. In my experience, this concept has been nearly reduced to rubble.
Experience: I mean actual experience, not just years in the real estate investment industry. Experience in success, learning from disastrous failure, and accepting that you’ll never know it all. You’ll also never see it all.
Investing Is Not One Size Fits All
I recently had a client pull out $540,000 via multiple refinances of several small investment properties. It was tax-free by definition. The monthly debt service on every property went down. What should he do with it? Experience screams the answer at me: There’s no one right answer for every investor. Period. End of sentence.
For this guy who’s approaching 50 years old at the speed of sound, there are a few very solid answers—or should I say, solutions. He’d worked himself into, at one time, 10 duplexes, none of which is 10 years old yet. They appreciated like crazy, due to the fortunate timing and strategic locations. At the time of purchase, I told him that they would appreciate. What fueled my belief was simple: Demographics combined with supply and demand.
He also had, over the years, acquired six figures’ worth of notes secured by homes in multiple states. They were all in first position, though that certainly isn’t required. The income isn’t totally taxable as his accountant has been able to “shelter” some of it.
The Power of Cash Flow
First, let’s talk about cash reserves, a subject some treat like dodgeball. He already has roughly $150,000 or so in reserves. Knowing him, he’ll add to that just a bit. He’s like me—meaning, conservative. Investing is just that—investing. It’s not a fun night in Las Vegas.
He bought three brand new nightly rental homes in the southern part of Utah. The homes he bought were already zoned for nightly rental, so that wasn’t an issue. It’s the reason I haven’t entered into that market until now. The huge majority of nightly rentals around the country are illegal in one way or another.
He’s now taking all the cash flow from his remaining half-dozen Texas duplexes and will speed up the principal paydown of those Utah loans one at a time. The cash flow from the nightly rentals will, of course, be added to that figure. Once the first home is paid off, the second home’s loan won’t last long, as the NOI (net operating income) is greater than the GSI (gross scheduled income) for the same home rented to a family of four.
Free ’n clear, those Utah homes alone will conservatively give him—wait for it—five figures of cash flow, monthly. How did we arrive at those numbers? With incredible conservatism. That’s how.
Keep reading the article here:
Subscribe to the BiggerPockets Channel for the best real estate investing education online!
Become a member of the BiggerPockets community of real estate investors – https://www.biggerpockets.com