Rentals are a business. So in this type of business, how can you make some cold hard cash? The best way to make cold hard cash is to manage your rental funds well.
How Do I Make Cold Hard Cash?
Startup money + operation costs = EARNED income (aka — cold hard cash)
The key to a successful business is to properly handle all of the ingoing and outgoing cash. As discussed in Rent By Direct Deposit, your income should be directly deposited into your account(s) by your tenants per your awesome lease.
You may be asking, “How do I figure out which money goes where for what?” Let me share some tips with you managing your rental funds, or in other words making cold hard cash.
My Four Basic Account Types for Managing Rental Funds
You need to have a plan for:
- Operating Account – We have a separate operating account for every property. This operating account receives all of the rent directly from the tenant. This allows us to know exactly who has paid and who hasn’t. If an account gets hacked, then access to just one account has been compromised. We do not need more than $500 – $1,000 in this account. While we use it a little for our emergency needs, we move a majority of the money into another account, which no one else has access to. It also lets us have our reinvestment funds (from all of the properties) in one general area.
- Security Deposit Account – Every single house has their own security deposit account. We move the money into the account that only we can access. Some states require these accounts to be operated under VERY strict criteria, but many others don’t. We like to separate the accounts as a personal preference. This way the security deposits are held separately, safely, and in compliance with all laws (no matter the state).
- Reserve Account – We like to continue to build our other retirement baskets and not just depend on rental income to fund our retirement dreams. The stock market is an amazing source of investment potential, but it is not my specialty. We invest in the stock market through making contributions to my husband’s retirement account. The funds are purchased at a great price and are diversified well. This retirement account also doubles as our Reserve Account, as it can be used to help us qualify for a mortgage. Each bank/brokerage house may have different qualifying guidelines, but in general you need to show at least six months of reserves for EVERY house you own. So you can continue to work toward your real estate dreams while still investing in the market.
- Saving for the Next House (if applicable) – If your goal is to continue growing your rental portfolio, you need to have an account that you can put money into to help save for the next purchase. We use a “general” account where we put all of the profit from our entire rental portfolio. This is our growth fund for our next purchase and also doubles as an emergency fund should something come up. If you are keeping your rental portfolio to one house, this account is your emergency fund.
Things to Consider:
Growth – We are in the growth phase, with a goal of 10 houses by 2017. As we are in a growth phase we need lots of money that is easily reachable. We personally use this as an emergency fund too. In the few “bare” months after we buy a house but before we fill it with tenants, we have used credit cards and and other not as easily accessible accounts to fall back on in the “true” case of an emergency. While this isn’t a good plan for everyone, as a dual income family with little fixed costs, we are comfortable with this.
Maintaining – If you are maintaining rather than growing, you should have enough cold hard cash to cover your emergencies. I personally would recommend $6,000 or as much as your most expensive repair (roof, water heater, AC system, etc.) would be. While you need cash squirreled away with multiple houses, remember that you will also be able to spread the costs over your entire portfolio. We have more expenses with five houses than one, but the average maintenance costs have gone down significantly.
It is important to make sure that you are managing your cold hard cash. If you have too much and don’t have somewhere else to put it, you should pay off your houses or invest it in your retirement, stock market, etc. Most savings accounts are only earning 1%, which means it really isn’t wise to have your cold hard cash sitting in a low earning savings account unless it is for short term purchases.
On the other hand, if you have too little in your accounts (such as your reserve account because you paid off a house) then you would have to turn down an amazing deal because of the lack of a down payment or of reserve requirements. In the rental business, you need to properly manage your cold hard cash in order to make sure you maximize your potential. The key is to have a property balance over time based on your financial position and comfort. You will figure out what works best for you.
How do you have your rental accounts set up?1