Buying an investment property can seem daunting. Saving enough money for a down payment (ideally 20%) is one thing, but investors also must account for other costs such as, property taxes, insurance, closing fees, and repairs. Sticking to these 10 helpful tips on how to save money for a house in a year or less, will ensure you reach your goals, as quickly as possible.
HOW MUCH MONEY DO I NEED TO SAVE TO BUY A RENTAL PROPERTY?
Before we dive into our money saving tips, let’s talk about how much money it’s going to take to buy an investment property with a 20% down payment. Whether you’re new or experienced in real estate, it’s important to understand which markets or areas are best to buy in. Buying in growing markets will lower your risk of losing money and increase likelihood of positive monthly cash flow. If this is your first time buying a real estate, it’s a good idea to start with a lower cost property.
Let’s say you find a rental property between $50,000 and $80,000, you’ll need to save between $10,000 and $16,000 cash for a 20% down payment. But don’t forget to account for additional expenses, like closing costs, repairs, and enough money in the bank to cover vacancies and maintenance. Your money saving goal should be around $20,000 to $25,000. The best way to ensure a return on your investment is to put 20% down along with enough money in reserves to pay for necessary repairs, maintenance and vacancies. Once you have an idea of how much money it’s going to take to purchase a rental property, in a market that makes the most sense, the next step is to implement a savings play. The tips below will help you reach your goal in a year or less.
TIP 1: PAY YOURSELF FIRST
Prioritize Saving for Your Property
Saving money is an easy concept, logically. However, most Americans find themselves spending more money as they make more money. According to the U.S. Federal Reserve, almost half of Americans have less than $400 in savings to cover an emergency.
The first (and best) step to saving money is prioritization. If you are setting a goal of saving for a down payment on a house or rental property, your spending should be a reflection of that goal. Making unnecessary purchases, especially on a whim, indicates that saving isn’t at the top of your priority list. Write down a savings plan, and make your spending a reflection of your priorities and value system.
In this day-and-age, it’s never been easier to automate your money and savings. If you struggle putting away a certain amount of money every month, make it easy on yourself and take advantage of automation. Figure out how much money you can afford to save each paycheck or month and have that amount automatically deposited into a designated savings account. This will ensure that you are sticking to your savings goal without even having to think about it.
TIP 2: SET UP AN ACCOUNT THAT YOU DON’T SEE
In addition to automation, set up an account separate from your primary bank. Limit your accessibility to these funds and forget about it. The idea here is, out of sight, out of mind. Make this account accessible only when you’ve reached your savings goal. Also consider looking into higher interest savings accounts that may be available with certain banks. Even 1% can make a difference in the long run.
TIP 3: PAY OFF DEBT
Imagine being able to put all the money you spend on paying off debt and interest every month into a savings account. Once you are debt free, you will be amazed at the amount of money you can put towards savings every month. Watching that money grow, instead of disappearing into the debt and interest abyss, will not only create momentum to reach your goals faster, but give you peace of mind.
If you’re having a hard time getting rid of your debt on your own, Consumer Credit Counseling Services (CCCS) has a large network of debt counselors that can help. And the best part, it’s free! This non-profit organization will put together a budget, explore options and negotiate with creditors to minimize your debt.
Additionally, if you have student loan debt and are waiting to pay that off, before considering buying a home or rental property, check out our recent article, Should I Pay Off Student Loans or Invest My Money?, for a more in-depth look.
TIP 4: MAKE SHORT-TERM GOALS
Avoid making big, long-term goals like, “Save $50k in two years.” Even if that is a realistic goal for you, it can be overwhelming and may cause us to make excuses for spending money on unnecessary purchases or procrastinate. Starting with a small, manageable short-term goal, like “Save $25 per week,” has proven to be more successful and will ensure that you eventually reach your long-term goals. Slowly, but consistently adding to your savings for a down payment on a rental property will create lasting habits without feeling overwhelmed.
TIP 5: GET REWARDED FOR YOUR SPENDING
Credit cards get a bad reputation for causing people to easily acquire debt. However, if used correctly (spending within your means), they can be an excellent tool for building credit. Using a credit card to earn 2% cash back on money you are already spending, helps lower interest and insurance rates, qualify for higher credit limits and set you up to, not only purchase a great rental property, but ensure you’re getting the best rates possible. Learning how to correctly manage your credit, by using a credit card with rewards specific to your goals, will put you in a better overall financial situation and make it easier to put 20% on a down payment.
TIP 6: SHOP AROUND
Dive into your monthly expenses and see if there are ways to cut costs and save money. Reevaluating your recurring bills, like cell phone plans, internet or tv providers, car insurance, etc., will not only give you a better idea of how much money you’re spending and where, it also provides the opportunity to see where you can save money. Shop around for better deals from competitors on car insurance, or reduce your $100 cable bill, by switching to a $10 streaming subscription (like Hulu or Netflix). You’ll be surprised by how much money you can save by simply calling providers and leveraging competitors against each other to get a lower price. Shaving even $20 a month, by minimizing monthly expenses, will add up in the long run.
TIP 7: SAVE UNEXPECTED MONEY
Unexpected money comes in all different forms including, end-of-year bonuses, Christmas or birthday gifts, tax returns, etc. Commit to putting any extra cash you receive throughout the year directly into your down payment savings account. You’ll be surprised at how much money you are able to save in just a year’s time.
TIP 8: MATCH NONESSENTIAL PURCHASES WITH SAVINGS
While it’s important to stick to your savings plan and minimize non essential purchases, there’s always going to be that extra large coffee you buy after a late night, or unexpected dinner with a friend in need. Try and stick to the rule of matching your non essential purchases with putting the same amount toward your down payment savings. If you can’t afford to match the amount you’re spending, you can’t afford the coffee or dinner either. Hold yourself accountable and try to avoid justifying unnecessary purchases if you interferes with your long-term goal of buying real estate or a rental property.
TIP 9: SELL YOUR STUFF
Have things lying around the house that you don’t use anymore? Earn extra money by selling them online or at a local second-hand store. Do you have an extra room, empty basement or travel frequently for work? Consider renting out extra space or using a service like Airbnb or VRBO to maximize earnings with the resources you already have. Getting creative and thinking outside the box to make extra money can make a substantial impact on your savings goals.
TIP 10: EAT IN
This tip is suggested over and over again, because it really works! Try keeping track of all the money you spend on eating out over the course of a month. Let’s say you go out to lunch at work three times a week and spend $5 each time. That’s $15 per week, $60 per month and $720 per year, on lunch. Imagine if you packed a lunch from home four days a week, and bought lunch only once a week. You’d end up saving $480 a year! Taking a closer look at your small, frequent food purchases to see how much you’re actually spending, will completely change your outlook on how easily you could start saving money today. It sounds like a no-brainer, but most people have no idea how much of an impact cutting out just one food purchase a day or week can have on your bank account. Also consider designating a “no spend” day, once a week, where you eat in, watch a movie or have a game night at home.
If your goal is to save enough money to buy a rental property in a year, start today by following these 10 simple tips and commit to doing everything possible to achieve that goal. Saving money can be challenging, if it wasn’t, everyone would be doing it. Just because you’re minimizing your spending, doesn’t mean you have to totally give up your lifestyle. Be realistic with your plan, but get creative when it comes to taking advantage of free or cheap entertainment, food, travel, etc. Once you create and stick to daily spending habits, you’ll feel empowered to make saving money more than just a goal but a way of life.