It’s not really a secret anymore. Real estate is the best, fastest, and most predictable way to build wealth. If you play by the rules, don’t get emotionally involved, and use objective decision-making to invest in the right rental properties, you will generate revenue over time. However, there’s one big question that remains: What do you do with it?
7 Smart Ways to Use Rental Income
Let’s say you have five rental properties and that they collectively generate $2,500 in cash profits every month. If you’re just putting that money in the bank and not touching it – or, even worse, letting it feed your own lifestyle creep – you’re making a big mistake. That $2,500 per month (or insert whatever the amount is for you) could be the basis for accelerating your wealth-building efforts.
Every situation is unique, but here are several efficient and proactive ways you can put your rental income to use:
1. Establish an Emergency Fund
The first step is to funnel money into emergency funds (if you don’t already have them). When we say emergency funds, we’re referring to two specific types of emergency funds:
- Household emergency fund. Before you do anything else, make sure your family has at least six months’ worth of cash savings in the bank. In other words, if it costs you $5,000 per month to pay your basic expenses, you need at least $30,000 set aside in a dedicated checking account. This creates margin in your financial life and gives you a cushion against unforeseen expenses.
- Rental property emergency fund. Secondly, you need an emergency fund for your rental properties. We recommend at least three months’ worth of cash per rental property. So, if it costs you $1,000 per month to operate each property and you have five of them, this means you need at least $15,000 ($1,000 x 5 x 3) set aside.
When you have enough cash set aside to help you weather any short-term issue, it provides a huge source of relief. You can stop looking over your shoulder and watching your bank account balances like a hawk. It frees you up to focus on bigger and better things.
2. Save Up for More Rental Properties
Once you have your emergency funds in place, there are a number of directions you can go. One smart option is to begin saving up money to purchase additional rental properties. This allows you to exponentially increase your profits over the long run. And once you get to five, 10, or 15 properties, you should have enough cash flow to allow you to purchase a new property every couple of months.
When saving up to buy additional rental properties, it’s smart to save enough to make a 20 percent down payment. This will help you avoid PMI when financing properties. It also makes you a more attractive candidate for loans.
3. Pay Down the Property
This tip may or may not make sense for you, depending on your financial situation and goals. If you’re only paying 2.75 percent on a mortgage, it doesn’t make much sense to pay extra on the mortgage. You’re basically borrowing “free” money.
However, if you have a higher rate – like 5 or 6 percent – and you’re looking to retire soon and strip away all debt, making extra principal payments is a great idea. (Obviously, when you pay off the loan, your monthly profits will increase rather dramatically.)
4. Cover Your Own Mortgage
Some investors use the profits from their rental properties to cover their own personal mortgage on their primary residence. In fact, you might be able to use the money you make to cover a much higher mortgage than you’d otherwise be able to afford. (You could also use it to accelerate your payments and pay off your mortgage faster.)
In a similar vein, you could take your rental income and pay down other forms of debt, including high-interest credit card debt, student loan debts, medical bills, etc.
5. Save for Retirement
While your rental properties are a source of retirement income in and of themselves, diversification is always wise. You may want to begin setting aside a portion of your rental profits to build a more traditional retirement portfolio with stocks and bonds. This allows you to tap one investment and use it to make another.
If your finances are in a healthy place and you can afford to do so, you might think about putting 5 to 10 percent of the profits into speculative investments like cryptocurrency or startups. You’ll probably miss on most of these, but the one or two successful “gambles” can pay off big.
6. Invest in Yourself
Don’t underestimate the power of investing in yourself. You are your greatest asset. Use some of your monthly profits to purchase courses and books. Pay for mentors and mastermind groups. Attend real estate investment conferences and networking groups. This form of education is usually way more powerful and high returning than formal education and degrees.
You might even think about funneling a portion of your profits into a dedicated “personal development” fund. Whether it’s $100 a month or $1,000 a month, this allows you to set aside resources to pay for your own development when these opportunities arise.
7. Quit Your Full-Time Job
Are you tired of your full-time job? Is it wearing you down and preventing you from spending more time with your family? Would you rather venture into real estate full-time?
Once your monthly rental income equals or surpasses your full-time income, you have the green light to quit and focus all of your energy on real estate. There’s no reason you shouldn’t be able to grow your portfolio and profits even more when doing it full-time.
Green Residential Professional Property Management
At Green Residential, we offer comprehensive Houston property management services at an affordable rate. When you partner with us, you save time and eliminate so many of the headaches that are traditionally associated with property management.
Want to find out more about how we can help you streamline your Houston rental property portfolio? Contact us today for a free analysis!