You’ve decided to invest in real estate, but creating a plan to save for a rental property seems daunting. Not only will you need money for the downpayment, but you’ll also need cash set aside for things like closing costs, property taxes, repairs, and cash reserves. To get you headed in the right direction, we’ve rounded up money-saving tips so you can reach your goals as quickly as possible.
How Much Money Do You Need to Buy a Rental Property?
Before diving into ways to save up money for a rental property, let’s talk about how much money it will take. As you begin the process of saving, you’ll also want to start researching the best places to buy rental property. While you don’t need to have a real estate market nailed down to save, it’s a good idea to understand the price points of potential investment properties.
Let’s run some basic numbers. You are looking at rental property between $80,000 and $125,000. For this price point, you’ll need to save between $20,000 and $31,250 cash for a 25% down payment. But don’t forget to account for additional expenses, like closing costs, repairs, and cash reserves to cover vacancies and maintenance. Your money-saving goal should be around $26,000 to $38,000.
Buying in growing markets helps lower your risk of losing money and increases the likelihood of positive monthly cash flow. Many first-time investors start by purchasing a lower-cost investment property, which helps with the amount needed. To help you get a plan in motion, we’ve rounded up some money-saving tips to help you reach your goal in a year or less.
Prioritize Saving for Your Rental Property
The first (and best) step is to prioritize saving money. If you are setting a goal of saving for a down payment on a house or rental property, your spending should reflect 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 reflect your priorities and value system.
Saving money is an easy concept, logically. However, most Americans spend 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. Don’t fall into the spending trap and prioritize your savings.
Automate Your Savings
In this day and age, it’s never been easier to automate your money and savings. If you struggle to put away a certain amount of money every month, make it easy on yourself and take advantage of automation. Determine how much money you can 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 thinking about it.
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.
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 you 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 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.
Pay Off High-Interest Debt
Get real about your debt by knowing what you owe and the interest rates. Make a plan to pay this debt off. 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 also give you peace of mind.
If you’re having difficulty 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.
Understand How Credit Cards Help You Build Credit
Credit cards have a bad reputation for causing people to acquire debt easily. 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 already spend helps lower interest and insurance rates, qualify for higher credit limits, sets you up to purchase a great rental property and 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 improve your overall financial situation and make it easier to put 25% on a down payment.
Evaluate & Reduce Monthly Expenses
Dive into your monthly expenses and see if there are ways to cut costs and save money. Reevaluating your recurring bills, such as cell phone plans, internet or TV providers, car insurance, etc., will give you a better idea of how much money you’re spending and where and give you the opportunity to see where you can save money.
Shop for better deals from competitors on car insurance, or reduce your $100 cable bill by switching to a less expensive 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.
Other Ways to Save Money for a Rental Property
Unexpected money comes in various forms, including end-of-year bonuses, Christmas or birthday gifts, tax returns, etc. Commit to putting any extra cash you receive throughout the year into your down payment savings account. You’ll be surprised at how much money you can save in just a year.
While it’s important to stick to your savings plan and minimize nonessential purchases, there will always be that extra large coffee you buy after a late night or unexpected dinner with a friend in need. Try to stick to the rule of matching your nonessential 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 interfere with your long-term goal of buying real estate or a rental property.
Do you have things lying around the house that you don’t use anymore? Sell them online or at a local second-hand store to earn extra money. Do you have an extra room or an empty basement, or do you frequently travel for work? Consider renting out extra space or using a service like Airbnb or VRBO to maximize earnings with your existing resources. Getting creative and thinking outside the box to make extra money can substantially impact your savings goals.
Keep Track of Your Spending
This tip is suggested over and over again because it 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 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 their bank accounts. Also, consider designating a “no-spend ” day once a week where you eat in, watch a movie, or have a game night at home.
Final Thoughts
If you want to save enough money to buy a rental property in a year, start today by following these simple tips and commit to doing everything possible to achieve that goal. Saving money can be challenging. If it weren’t, everyone would be doing it. Just because you’re minimizing your spending doesn’t mean you must give up your lifestyle. Be realistic with your plan, but get creative when 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.
