Real estate investing can be the ticket to your financial freedom. However, the one question that every beginner investor has is, “How much money do I need to invest in real estate?” It’s no secret that investing in real estate costs a lot of money. In fact, very few people are able to pay cash for their first investment property. The good thing is that there are many ways of financing real estate investments, some of which need little to no money down. However, the most common real estate financing method is through investment property loans. If you are going to go for this financing option, you will need to start saving up for a down payment if you haven’t already.
Related: Can You Buy a House with No Money Down for Real Estate Investing?
Many people simply have no idea how to save for a down payment. Saving for a down payment on an investment property is easier said than done. It is one of the biggest obstacles that aspiring real estate investors need to overcome before purchasing their first investment property. It is for this reason that we have put together this guide to help you save up for a down payment on investment property.
Before you get a mortgage for your investment property, you should make sure you have enough money for down payment. So let’s start our guide by answering one important question: how much should you be saving?
How Much Should I Save for a Down Payment on Investment Property?
There is no definite answer to how much to save for a down payment. The down payment you will need will depend on a number of factors, including the nature of the investment property itself and the loan type. However, for most mortgage lenders, you will need a minimum down payment of 20%. For a more accurate estimation, you can find the average down payment in your city to know how much money you should save.
Keep in mind that the higher your down payment on investment property is, the less your mortgage loan will cost in the long run. Therefore, you want to save as much as possible for your down payment.
Related: Why You Shouldn’t Put Less Than 20% Down Payment
So, how can you save up enough down payment needed to buy an investment property? For first-time investors, saving for a down payment can feel overwhelming since it is usually a lot of money. If it was easy, everyone would be doing it. Nevertheless, you shouldn’t be discouraged. If you have a good plan in place, you can do it. Here are some tips to help you save money for down payment quickly.
How to Save for a Down Payment on Investment Property
1. Get Clear on Your Saving Goals
Before you start saving for a down payment on rental property, you should set specific down payment savings goals. You need to create a plan that clearly outlines exactly how much you need to save, how long it will take you to save for the down payment, how often you intend to add to your fund, and how much you will be adding. Short-term goals on what to save weekly or monthly are usually more manageable than big, long-term goals. As you slowly and consistently meet your short-term saving goals, you will eventually reach your long-term goals.
Without clear goals, it will be difficult to get started in real estate strongly and to maintain your focus. Nevertheless, it’s important to be realistic about what you can afford so that you don’t totally give up your lifestyle. Once you’ve decided on all these numbers, you just need to be committed to saving.
2. Pay Off Your Debts
Spending your monthly income paying off debts and their interests can seriously limit your saving ability. You could be putting aside all this money for the down payment. Start by paying off your high-interest rate debts.
Once you are debt-free, you’ll have more money to put towards your savings for the down payment on an investment property. You will also have greater peace of mind to focus on your saving goals. To help you focus further on saving for down payment, ensure you have an emergency fund of about six months of expenses. It will put you in a place of financial security so that you focus on putting money towards the down payment.
3. Designate a Separate Savings Account for Down Payment
Having a down payment savings account has a number of benefits. First, if you are saving towards a number of goals, separate accounts will help you keep your finances in order and deter you from using the money meant for the down payment for other purposes. You will also be able to track your progress easily. Minimizing accessibility to these funds will make you even more committed to never using these savings for other purposes.
4. Prioritize It
Many people dream about owning a rental property but very few are actually committed to ensuring they have enough saved for the down payment. Not many are willing to give up their current lifestyles and set aside money for the down payment. In fact, most Americans spend all their income and have no idea how to save for a house. The result is that they either take too long to save a substantial amount of money or never get started at all. The first step to ensuring that you save enough money for a down payment is prioritization. You need to put saving for a down payment at the very top of your priority list and be laser-focused. This will enable you to save a good down payment within a shorter period of time.
If your income is fairly consistent, consider an automatic savings plan. This means that you automatically transfer a specified amount of money to your down payment savings account every time you receive your monthly paycheck. Start with a small amount and increase it gradually as you get comfortable with the process and as you improve your finances. Automation will help you stick to your savings goal without much thought.
5. Lower Your Expenses
One of the most important tips on how to save for a down payment is to live as frugally as possible. Pay attention to your spending and cut off unnecessary expenses that eat into your current income. When you review your recurring expenses, ask yourself which ones can you reduce or eliminate completely. You should then put this money into your down payment savings account. You will need to give up short-term desires for the long-term goal of owning an investment property. Though it may take some sacrifice, it will be worth it in the end. Get creative and come up with ways you can tighten your spending.
Here are some of the ways you can lower your monthly expenses:
- Buy used items whenever possible
- Stay in more and party less
- Eat out less
- Do home workouts instead of going to the gym
- Trim your clothing budget
- Buy items in bulk at a discount
- Shop around before buying anything to find the best deals
- Live with a roommate instead of getting your own place
- Move to a cheaper house
- Skip vacations for a while
- Take advantage of cheap or free food, entertainment, travel, etc.
- Hold off your retirement savings
6. Boost Your Income
Boosting your current income is also one of the top tips on how to save for a down payment. You can use your spare time to make some extra money to contribute to your down payment. Be creative and figure out ways to increase your income.
Here are some ways you can maximize your earnings:
- Work overtime at your full-time job
- Try to get a pay raise
- Increase the rates of your services
- Build a side business
- Take up a second job
- Rent out your spare room using a service like Airbnb
- Sell items you don’t use
- Rent out your extra vehicle
7. Save Unexpected Money
Most people tend to spend unexpected influxes of money on luxuries and other unimportant things. After all, it wasn’t on their budget. However, you should commit to putting any extra money you receive unexpectedly directly into your down payment savings account. Unexpected money may come in the form of birthday gifts, Christmas gifts, repaid loans, tax returns, inheritance, end-of-year bonuses, etc. You could save a substantial amount of money this way.
The Bottom Line
If you are looking to buy an investment property soon, saving enough money for a down payment should be your priority. These smart tips on how to save for a down payment will help you reach your goals faster. It’s also important to understand that there will be other costs apart from the down payment that you’ll need to consider when buying an investment property. You should take into account costs like insurance, property taxes, repairs, and closing costs.
When you’ve worked hard and saved up enough down payment on a house and other costs, the last thing you want to do is buy an investment property that is not profitable. You need to make the most out of the down payment you’ve saved. Be sure to use Mashvisor’s tools to find the best performing investment properties in the US housing market that fit your criteria.
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