Today’s question is a simple one and a good one. And it comes in from Anthony and he says, Hey Marco, my fiance. And I plan to start working with your investment counselor. As soon as we gather the capital we need to get started, which I have later found out is getting close. Question for you, what are your thoughts on reinvesting the cash flow you get from the rentals into the stock market index fund. I want to do this with returns about 13% a year, inception annualized at surface level. It seems like a great way to milk more out of that money, but I’m not sure if my strategy is flawed to my understanding of depreciating tax law would allow me my cashflow to be tax-deferred in the stock market.I’d be hit for longterm capital gains at around 20%.
Would it make sense to reinvest the net cash flow into the market in an attempt to increase my overall return on investment? I’m 26 years old and our mindset right now is growth. We have a goal to buy a lot of properties in the next decade. Thank you. I did reply back to Anthony and he later sent me an email saying my fiance and I are working extra hours to get as much capital as we can to get started on a good foot with rental properties. So we’ve been busy as well. I’ve noticed that you already sort of covered my question in your podcast on episode 177, which helped give me some good advice or guidance. I appreciate all your guidance. Have a good one.
Okay, Anthony. Good question. So I don’t think this is flawed advice at all.
What you’re doing is a good idea. I mean, if you can get a 13% return on the cash as you save for your next property, that’s a great way to go about it. And your cash is not sitting idle. It’s moving it’s, you’ve got it working. And a 13% return is not anything to sneeze at. So if you can get a 13% return on your investment or an annualized return of 13%, then go for it. I mean, that’s a pretty darn good return and it’s far better than it just sitting as cash or being in a savings account in a bank at, you know, a quarter percent or whatever you can get. You know, of course, you always have to remember that past performance on any of these funds like index funds and mutual funds and whatnot, that past performance is by no means a guarantee of future returns.
A lot of funds do well for many years back to back. And then all of a sudden they hit the wall and sometimes they even lose money, but for smaller amounts of cash, it is a good idea. If you have larger chunks of cash, meaning enough that you can put a down payment on your next rental property. I mean, that is your next goal. That’s your ultimate goal as you build your portfolio. So you’d be better off investing that chunk of cash into the next rental. Then, you know, having larger chunks of cash sitting around the idea is really just to save a, not for the sake of saving. You never save for the sake of saving. That really is a money mistake. The only reason to save money is to one day, invest it. You want to deploy it as soon as possible for the purpose of making your next investment.
You want to turn that into cash flow and you want to turn that into an investment, an opportunity for yourself, but just don’t let it sit as cash. If you can get 13%, go for it until you can build up a chunk of cash to put as a down payment on your next investment and written and repeat, just keep doing that until you get to the size of a portfolio that will make sense for you and your, your wife or your fiance. Now, one other comment, and this is another strategy, not necessarily for you, but in general, many people like you are in growth mode. They’re building a portfolio and they have a goal of X number of properties, but there are people who have reached that portfolio size that makes them comfortable, that will help them get the lifestyle that they want to achieve their financial goals.
And at that point, whether that’s five properties, 10 properties, 15, 20, 30, 50 properties, at some point, you’re going to reach the size of portfolio. That makes sense for you. Now, odds are, you will have mortgages on those properties or probably most of them maybe not necessarily all of them. Then what you can do as an alternate strategy. When you get to the portfolio size, that makes sense for you. You could use that cash flow or the cash flows from the properties or a portion of the cash flows from the properties to start to pay off the mortgages and what you do. There’s two ways to go about this, but typically what you do is you create a snowball effect and you start to take that cash flow or the cash flows from the rental properties. And you put that towards usually the smallest mortgage on whatever rental property you have.
You pay that down, you pay it down as quickly as possible. So every month you’re paying off additional principal and you get that first one paid off. And then you go to the second property with the second smallest mortgage. At that time, it would actually be the property with the smallest mortgage. And you now put those additional cash flows towards that second mortgage. And you pay off, you accelerate the pay down and pay off of that second mortgage. And then you keep doing this. You go to the third property, the third property with the smallest mortgage in your portfolio. And you pay off that third property, his mortgage with the aggregate cash flows from all your properties. And this creates a snowball effect where you start to knock off the mortgages. Now, this is a strategy that is good for some people and other people don’t want it.
They always want to be leveraged. They always want to have debt. They always want to have that equity working for them. They just don’t want it sitting in the properties. And that’s okay too. They’re just two different strategies. They’re both good. They’re for different people. But what you do is you just take those cash flows and increasing cash flows and pay off one property after another, after another, after another. And your cash flow starts to grow after paying off each and every one. Anyway, that’s taking it one step further, but hopefully, that completes the answer to your question, Anthony. All right, with that, I will just end it here.
If you have a question about investing or finance or real estate in general, let me know. Just go to AskMarco.com or passiverealestateinvesting.com. Click the ask, Marco button, submit your question. I will do my best to reply and or answer it on the show. And if you haven’t already, remember to click that subscribe button, be a subscriber to the show. I put episodes out every week, sometimes two, sometimes three. That’s it. So thank you for listening. I will see you on our next episode.
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