Review my previous posts for Part One and Part Two of this article!
Where do you invest your real estate profits or house money? I don’t think there is any one correct answer. The answer depends on your current financial position and tolerance for risk. The safest option is to build an emergency fund for your family. An emergency fund is money set aside to cover several months of your family’s living expenses. This money is parked in an interest-bearing liquid account, like a money market account. The emergency fund is for handling emergencies. A job loss, a big medical bill or a major expenditure you hadn’t planned on having. It is your family’s safety net.
This option probably provides the lowest actual return on investment, but it provides the absolute best peace of mind. I have around five months of my family’s living expenses tucked away for emergencies. Now, this wasn’t the case for many years. In the beginning of my journey, I operated without an emergency fund and invested everything back into real estate to build more cash flow. I have a very big tolerance for risk. This decision was truly risky for my family. However, at the time, I didn’t have any children. Now that I am a little older with a family, I have prepared for any unforeseen emergencies.
If you don’t want to save thousands of dollars for your emergency fund, you should at a minimum keep a line of credit open and available. You can access this line of credit to cover your emergencies. The problem occurs when you don’t have savings or access to money when rocky times hit. If you lose your job, the banks will not loan you any money. You could put your family in massive jeopardy if you don’t have a credit line established before the emergency hits. When I was operating without an emergency fund, I kept credit lines open and available at all times. I used these credit lines from time to time to save me. In fact, I took cash withdrawals from credit cards to make payroll on several occasions!
The easiest way for you to acquire your emergency fund is to sell an investment property to your tenant/buyer and not reinvest the sales proceeds. You will have to pay taxes on your gain, but your emergency fund will magically appear. You could also refinance an investment property and put the proceeds of you new loan into your emergency fund. Now if you didn’t own any real estate, what would you have to do to build an emergency fund?
You got it ...
You would have to save it from your weekly paycheck. How long would it take you to save several months of your living expenses? Forever. …
Many people don’t have emergency funds because they don’t have a fast, painless way to build it. Can you see how funneling my first investing dollars into real estate helped me build an emergency fund quickly and easily? If my first investment dollars didn’t go into real estate, would I have an emergency fund? No.
The next option for your real estate profits is paying down debt. This option is also ultra-safe and highly recommended. Believe it or not, it provides a handsome return on your investment.
A quick check on bankrate.com showed the average credit card interest rate at 13.4 percent. In my opinion, paying down your debt beats investing in the stock market every single day of the week. If you have credit cards in this range of interest rates, you would be investing your money at a fixed 13.4-percent interest rate. You can’t beat that in the stock market. Maybe Warren Buffet can, but average folks like us can’t.
There are many different strategies to debt reduction, which I won’t cover in this article. But paying down debt is a safe and profitable option for your house money. When I say debt, I mean all car loans, credit cards, other consumer loans. These loans typically have higher interest rates and are not tax deductible.
To be continued again...
I just love cliff hangers. I'll wrap up this article in my next blog post! If you would like to have future blog posts emailed to you automatically, simply add your email into the box at the top right hand side of our blog!
Rob Minton
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