Most of us spend years working a job for our income, but sooner or later, it hits you: What if I bought investment properties and had cash flow coming into my bank account every month without having to work for it?
Of course, owning rental properties does take some work. But once you get underway and bring in an experienced property management company to handle the day-to-day tasks, you can indeed make money without lifting a finger most of the time.
So you believe you’re ready to buy that first investment property? That’s awesome! But you’ll need a down payment of 20% or more, usually. What should you do?
Don’t sweat that! We have you covered below on how you can save money for the down payment on your first investment property.
Automate Your Budget
Hands up if you have ever assembled a budget spreadsheet then abandoned it after three weeks. Yep. This is common.
We all know we need to save money, but human nature causes us to want to spend whatever we have. There’s a way out of this cycle, however!
Ramit Sethi, the author of I Will Teach You To Be Rich, counsels people to do two things:
- Automate your budget so bills and savings are automatically withdrawn
- Cut down expenses that don’t provide value in your life
The first step is to arrange to have all your fixed monthly costs come out on one day each month, so you know how much they are. In a perfect world, this should amount to no more than 50% of your total take-home pay.
Next, make an automatic transfer every month or set up your paycheck to place 20% of your income into a separate account for your rental property down payment. Now you’ve accomplished your forced savings plan; great!
Now let’s get rid of some of those unnecessary expenses that drain your checking account. Take a look at monthly payments that have little value, such as subscriptions for clothing, the $30 gym membership you don’t use, and the 500-channel cable service package. (Who has time for all that anyway?)
Other expenses you could chop away might include:
- Streaming apps; see if you can find cheaper options than Netflix and Hulu
- Automatic subscriptions: Birchbox, Blue Apron, etc.
Make More Money
The money you will save every month is the difference between what you earned and what you had been spending. Another way to save money for your down payment is of course to increase your income.
You might think, “well, heck, making more money isn’t that easy.” There are plenty of part-time jobs you could do around your full-time gig, though.
Consider driving for Uber, Lyft, Dominos, Doordash, and the like. All you need is to bring in another $400 or so per month so that can go directly into savings. Before you know it, you could have thousands put aside to buy your first property.
Think About Waiting to Buy a Home
We’ve been taught that the American dream is to purchase a house, and the sooner, the better. There’s nothing wrong with that, but it might not be the best move for a rookie real estate investor.
Many experts recommend saving money to buy a rental property first, which will start making you money. Buying and living in your home costs you money (the appreciation is a valid detail, but you don’t enjoy that benefit until you sell).
You can save money by renting a house or apartment and putting away what you would have sunk into a mortgage and monthly upkeep on your home. Once you have bagged several properties and have cash flow pouring in, buying your own home will be quite a bit easier.
Take Out a Second Mortgage
If you already own a home, don’t be alarmed: You can still go into investment properties. One option at this point is to take out a second mortgage and use some of the equity to purchase your first investment property.
Admittedly, any time you take equity out of your home, you are taking a risk: You’ll impose a higher payment on yourself. Also, you put yourself at a higher risk of going upside down on your home if the market hits the skids.
So you want to take out only as much as you need for the down payment on your investment purchase. Also, make sure you perform appropriate due diligence on the prospective acquisition, the rent it might attract, and the best possible price you can negotiate.
When you’re putting your home on the line, it’s vital to make sure the second property you purchase will produce cash flow each month after repairs and vacancies are figured in.
When you initially contemplate buying an investment property, the notion might seem too challenging. But if you pursue the strategies we have described above, you should be able to save enough money for a 20% or 30% down payment on your first investment property!