by Matt Schuberg

How Much Money Should You Save Up Before Investing in Real Estate?

Piggy bank on top of a pile of money

 

So you’ve made the decision to make the leap into real estate investing. You’ve spent hours upon hours researching and learning as much as you can about the industry. You’re done sitting on the sidelines and you’re ready to start taking action. But, do you really have enough money saved up in order to start investing in real estate? This is something you’ll need to be able to answer before you jump in.

 

How much is enough?

 

In order to answer this question, I need to break down what is required in order to acquire and maintain a real estate investment. Below is a list of the 5 questions you need to answer before investing in real estate.

 

  1. Do you have an emergency fund?

The most important thing to have before investing in real estate is an adequate emergency fund.. You can lose money investing in real estate, so make sure you have enough money saved to prevent financial hardship. The amount you will need to save will vary from person to person. For example, someone supporting four children with a lot of debt will need to save up a lot more than a single person with no children and little debt.

I highly recommend having enough savings to cover at least 6 months of expenses before you start investing in real estate. This will give you plenty of time to survive a potential disaster.

 

  1. What asset class do you want to invest in?

Are you interested in investing in single family homes? Multi-family? Commercial? How many units are you looking for? These are all things you need to know. The asset class you choose will have a huge impact on how much money you need to save. You need to determine what type of property you want to invest in. This will also help you determine what your price range is for your property. Someone who is looking to purchase a 50-unit apartment complex in the city will need to save up a lot more than a person who is looking to buy a single-family home in a small suburb.

If you are getting ready to invest in your first property, I recommend starting small. Find a property that doesn’t break your budget. Don’t spend all of your money on your first property. This will allow you to quickly find another property if your first investment doesn’t go as planned. Use what you learned on your first property and apply it to your next investment.

 

  1. What type of property are you looking for?

The type of property will also be a big factor in determining how much you need to save. Are you planning on doing a fix and flip? If so, you’ll need to factor in things such as repair costs, holding costs, and other expenses that come with these investments. Rental properties come with their own expenses, too. It’s important to remember to include vacancies, capital expenditures, and other unexpected costs into your analysis. These costs can be the difference between a property being a good or a bad investment.

Each type of investment comes with it’s own variables. Make sure you are aware of these variables and that you’ve accounted for them before you buy. Each person has their own approach when estimating what these costs will be, but make sure to be conservative with your numbers. It’s much better to overestimate your costs rather than underestimate them. Underestimating costs is a common cause of bad investment decisions.

 

  1. How much leverage do you plan to use, if any?

Do you plan to put a down payment on the property and finance the rest? Or are you a person who prefers not to have debt and wants to pay all cash? Obviously, the less money you plan on putting down to purchase the property, the less money you will need to save. The trade-off is that higher leverage tends to be considered more risky. A smaller down payment means you will have a larger mortgage payment, which equates to higher expenses for the property. The advantage to a smaller down payment is that you need less money to purchase the property, and you can use the money left over for other things.

Determining how much you should put down will depend on your individual risk tolerance and the specific investment you’re looking at. Maybe you decide to put down a small down payment because your numbers show that the property will still bring in a profit and you want to save the rest of your funds for other investments.

Or, maybe the seller is willing to give you a big discount on the purchase price because he needs money now, so you decide to pay all cash for the property. There is no right answer to this question. Decide what makes the most sense for you.

Many others have discussed the topic of investing in real estate with no money down. This is done by using other people’s money to acquire properties. This can be a highly effective technique, but I don’t advise anyone to use this strategy if they’re just starting out. Get some experience before you start putting other people’s money at risk. Both sides will be better off in the end.

 

  1. How long would it take for you to save up enough money?

Once you’ve answered the previous four questions, it’s time to figure out how long it would take you to save up the amount you need. If you already have enough money saved, great! Stop reading this and start looking for your first investment property. If you haven’t saved up enough yet, how long will it take you to get there?

If it’s going to take you more than a few years to save up enough, I suggest either increasing your savings rate or finding a new target property. It’s important to have enough saved in case you run into unexpected problems, but it’s just as important to get started. I think we’re all aware of the power of compound interest. The best time to invest is as soon as you can. Money can be made in any market, which I have already covered in this article. Do everything you can to get to the point where you’re ready to invest. It will pay off significantly.

 

Can I start investing without having much money saved?

 

empty-pockets

I understand how difficult it can be to wait until you save up enough money to start investing. You’ve already done all of your research and you’re ready to start investing right now. How can you possibly wait even longer to save up more money? I know the feeling, trust me. I’ve been there. I want to go over a few options that you have that might allow you to start investing right away.

One option that you have is investing in a syndication. A syndication is simply a pooling of money from a group of investors to invest in real estate. Investing in a syndication will allow you to get started with very little capital required. They are also very passive and are managed by someone else.

Another option to consider is investing through crowdfunding. Crowdfunding is very similar to a syndication, as they both involve pooling money together from a group to invest in real estate. The difference with crowdfunding is that it’s usually done all online and often involves more investors than a syndication. There are a few other differences between these two (legal structure, fee structure, etc.), but I won’t get into that in this article.

There can be other ways to get started in real estate without much money saved, but I believe that these are the two best options available. These options enable you to invest alongside real estate professionals and gain experience without requiring a substantial investment to participate.

Topics: Getting Started , Investments , Real Estate

Subscribe to RealCap Blog