How to Save Up Money to Buy a Rental Property
If you want to build wealth, some would argue there’s no faster or more stable path than real estate. But to become a bona fide real estate investor, you have to begin with your first property. Saving up enough money to put a down payment on that property is your first objective.
Below are a few ways you can do that.
- Set a Clear Savings Goal
You wouldn’t take a road trip without knowing where you’re going, right? Saving for a rental property is no different. The first step is figuring out how much you need to save. Look at the kind of properties you’re interested in, and research the average prices in the area you want to buy. Most lenders require a 20% down payment on investment properties, so if you’re looking at a $200,000 property, you’ll need at least $40,000 set aside.
Once you know your target, break it down. If your goal is to save $40,000 in five years, that’s $8,000 per year, or about $670 a month. You may also want to account for some of the expenses you’ll incur when you start renting out your property, like a good property management company.
Knowing your overall number helps to create a realistic savings plan and keeps you motivated.
- Cut Unnecessary Expenses
Saving money requires sacrifice, but it doesn’t have to be painful. Start by looking at your spending habits. Take a hard look at your monthly expenses – things like eating out, subscription services, or buying things you don’t really need. Cutting back on some of these expenses can free up extra cash for your rental property savings.
It’s also helpful to track your spending. Use an app or a simple spreadsheet to see where your money is going each month. Once you identify areas where you can cut back, make it a habit to save that money instead of spending it. For example, if you cut your dining-out budget by $100 a month, automatically transfer that $100 into your savings account for the rental property.
- Create a Separate Savings Account
It’s easy to dip into savings when all your money is lumped together in one account. To avoid temptation, open a separate savings account for your rental property fund. Having a dedicated account for this goal keeps it out of sight and out of mind, and it also helps you track your progress more clearly.
Consider using a high-yield savings account or a money market account that offers a better interest rate than your standard checking or savings account. The extra interest you earn may not be huge, but it’s better than nothing, and every little bit helps.
- Earn Extra Income
Sometimes, cutting expenses isn’t enough to reach your savings goal as quickly as you’d like. That’s when earning extra income comes into play. Look for ways to increase your cash flow by taking on a side hustle or part-time job. You could freelance, sell items online, drive for a ride-share service, or tutor in your area of expertise. The goal is to use all the extra income you earn from these side gigs for your rental property fund.
Another option is to negotiate a raise at your current job or find a new position that pays better. Even a small raise can make a big difference when you’re saving for a large purchase like a rental property.
- Automate Your Savings
We all know life can get busy, and it’s easy to forget to transfer money into your savings account each month. That’s why automating your savings is such a game-changer. Set up automatic transfers from your checking account into your rental property savings account every payday. If you can’t see the money sitting in your checking account, you won’t be as tempted to spend it.
Automating your savings takes the guesswork out of the process and ensures you’re consistently putting away money each month. Even better, it helps you build momentum. The more you save, the closer you get to reaching your goal.
- Be Patient and Stay Consistent
Saving up for a rental property takes time, and there will be moments when it feels like you’re not making much progress. But the key to reaching your goal is staying consistent. Stick to your savings plan, and remember why you’re doing this. Each time you add money to your account, you’re one step closer to becoming a real estate investor.
Celebrate small milestones along the way. If your goal is to save $40,000 and you’ve hit $10,000, that’s something to be proud of! These small wins can keep you motivated to continue.
You may also want to consider making some temporary sacrifices for long-term gain. For instance, if you’re willing to take fewer vacations or put off buying that new car for a few more years, you can speed up your savings and reach your goal faster.
Buy Your First Investment Property
Real estate investing is a marathon – not a sprint. Take your time saving up for your first property. It might take a few years, but it’ll be worth it. What you’ll find is that there’s a compounding effect once you get some skin in the game. It’ll probably only take you a few months to buy your second property, and even less to purchase your third and fourth.
Before you know it, you’ll have a rental property portfolio that will help you build wealth over the next couple decades.
