Real Estate Investing Basics

How Much Do You Need To Save for Your First Investment Property?

Expertise: Mortgages & Creative Financing, Buying & Selling Houses, Personal Finance, Real Estate Investing Basics
46 Articles Written
keys on top of dollar bills

You have discovered the power of real estate. Capital preservation, cash flow, appreciation, tax benefits—all words that are music to your ears. And you are ready to dive in! Then you check your bank account and realize you aren't really sure how much you need for your first investment.

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Not knowing the answer, you turn to the BiggerPockets Forums and post your questions, only to get a series of responses ranging from $0 to $100,000 and everything in between. What’s worse, most statements begin with the words, “It depends…”

Where do you start? Who is right?

Well, it depends.

Why Padding Your Savings Is Critical

While it’s true that you can get started in real estate for no money down, I often advise people to have at least $50,000 saved up. Not that you need $50,000 to buy that first property (you may need far less), but more importantly, so you can have a shored-up financial foundation and invest from a position of strength.

I call this having a financial moat. This financial moat generally consists of saving up a minimum of three months of personal expenses (I prefer having six to 12 months of expenses myself) and any deductibles in cash. This cash pile can help you navigate a job interruption, broken-down car, or health crisis, or buy you time to figure out your next steps financially should life throw you a curveball (like a pandemic!).

Related: 6 Ways to Get Started in Real Estate While You Save Money to Invest

How To Prepare Financially To Buy an Investment Property

Now that you have your financial moat in place, it’s time to figure out how much money you need to invest. In most cases, to buy a property you need to have the following.

Lending Expenses

  • Down Payment

This can vary widely depending on your investment strategy, market, and lending strategy. If you are using an FHA loan, this may be 3-5% of the purchase price. If you are using conventional or commercial financing, this may be 20-25% or more of the purchase price.

  • Closing Costs

This too can vary widely depending on your investment and lending strategy.

  • Reserves

This can vary from lender to lender, with most lenders post-COVID-19 wanting to see six to 12 months of expenses in cash or in escrow. I’ve even seen lenders requesting the insurance deductible set aside, as well.

Property Expenses

  • Rehab vs. Rent-Ready

The make-ready expenses on a property can vary widely, from simply changing the locks to a full gut rehab. In either case, make sure to have your full rehab/rent-ready scope estimate locked in prior to closing on a deal, and add a contingency to this budget to account for surprises.

  • Lease-up Expenses

Unless you are buying a turnkey with a tenant already in place, be certain to add in lease-up costs from anywhere from 25-100% of the first month's rent.

  • Vacancy Expenses

Be certain to factor in, at a minimum, one month of vacancy costs in your underwriting (which is 8%)—if not more—for the next year or two. Your property will be vacant at some point, it’s just a matter of when.

  • CapEx/Maintenance Reserves

It’s not uncommon for a new investor to “fudge the numbers” on their first property and not set aside adequate CapEx and maintenance reserves in the beginning. I’ve heard many stories like this: Investor closes on a property, and the water heater that’s supposed to have five years of life left goes out all of a sudden. You, as the new owner, will have to replace and repair items. A water heater costs the same whether it’s a $60,000 home or a $200,000 home.

As you can see, the costs to close a property and get it to profitability can add up quickly.

Related: 5 Ways to Buy a House with $2,000 or Less

How To Get Started Investing in Real Estate

So, how can you start navigating this process, building your “financial moat,” and building capital for your first investment? Here are a few steps to take.

  1. Pay down any consumer debt that will negatively impact your debt-to-income ratio and prevent you from getting decent lending. Look to reduce these payments first:
    • Credit cards
    • Personal loans
    • Car loans
  2. Set aside at least three months of personal expenses plus any deductibles for your health, car, and home insurance. Bonus points if you can get to six to 12 months. If you have some of your debt paid down, you can now snowball your previous payments to build up your personal reserves.
    • I like thinking of my Roth account as a double-duty retirement account since I can liquidate it penalty-free for most emergency needs. Moreover, you can leverage your employer payroll deductions and potential match to build this account quickly.
  3. When you are close to having a minimum of three months of reserves set aside, begin to determine your investment goals, investment strategy, and market. This will help inform what you will need for your other expenses.
  4. Talk to various lenders to determine your lending needs for down payment and reserves.
  5. Talk to local property management to understand what fees you can expect for your property expenses.

Wrapping Up

As you can see, it’s not a cut and dry answer for how much you will need to get started in investing. It very much depends.

By taking stock of your financial foundation and taking care to build your “financial moat” properly, you can invest from a position of strength. That way, you will be well-poised to navigate the wonderful world of real estate.

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If you’re starting out, what amount are you aiming to save? If you’ve already been investing for a while, how much did you save up before jumping in?

Share your numbers in the comments.

Whitney is a real estate investor and personal finance trainer. After purchasing her first rental in 2002 and hitting a home run, she nearly lost it all on her second deal. So she took control and figured out how to invest in real estate the right way. In 2018, she founded ASH Wealth and the Investor Accelerator Mastermind. In the Accelerator, she'll show you exactly how she built her portfolio: $500M+ in real estate assets, including 5,000+ residential units (MF, MHP, SFR, and assisted living), 1,430+ self-storage units across seven states, and over $3M in residential fix and flip real estate. (Though don’t tell anyone, BRRRR investing is still one of her favorite ways to invest!) She has been featured on BiggerPockets Real Estate Podcast episode #340, BiggerPockets Rookie Show episode #29, BestEver Podcast, The InvestHer Show, Investing for Good Podcast, and more!
    Jhoevonne Bergan
    Replied 13 days ago
    Thank you for this article! Trying to figure out how to move forward, all the little things that you need to know, to add up to being able to confidently move forward in investing.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    Glad you found value! Now go make it happen :)
    Jason Rushin
    Replied 12 days ago
    Thank you so much for this valuable information. Your timing on this was truly remarkable. This is a question I was just asking myself as I'm tring to put myself in the position to make my first investment.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    Glad it helped, Jason. I think 2021 is a good year for real estate!
    Carlos Ptriawan
    Replied 12 days ago
    Typical entry apartment rent is $1,000. If you get 1 rental value ratio that's equal to 110-120k per house. For 25% down and closing cost,reserve,etc...at least prepare for $35K for each entry-level house.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    True. As noted though, part of the $50K is actually to shore up your personal financial foundation and isn't necessarily directed to housing costs. Everyone has different risk tolerances :)
    Ran Bow
    Replied 11 days ago
    Love how your article starts out..."What’s worse, most statements begin with the words, “It depends…” and then your article ends with..... it depends.
    Tiffany Royal
    Replied 11 days ago
    This is quite timely too - I own a piece of property upon which I plan to build a rental home. I initially thought my construction loan would cover the entire cost of the build - from demo to painting - but turns out, not so, and to build what I really want, rather than cutting corners and get a half-crap product, I need to build my savings. My boyfriend and I sat down with my numbers and he said first things first, pay down debt, then save up. I'm feeling much better about my plan...
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 11 days ago
    You go, Tiffany!
    J Kearney
    Replied 11 days ago
    The 3-5% down FHA loan is for Owner occupied properties, not investment property purchase, unless you are purchasing a multi-unit property that you will be living in 1 of the units...you can use adjusted rental income from the other unit(s) to help with loan qualifying.
    Kathy Villagomez Investor from Long Beach, California
    Replied 10 days ago
    Excellent and timely article. I'm on step number 2. It's a realistic path especially like you said...want to invest from a position of strength.
    Fernando Maytorena Developer from Puerto Vallarta, Mexico
    Replied 10 days ago
    This post establishes a great roadmap for anyone looking to start his/her investment career on real estate. It is vital to have good personal financial management before thinking about long term investing.
    Andy Newbie
    Replied 10 days ago
    Due to being self employed, my wife and I have been rejcted for every single mortgage you can think of by countless lenders. So we are thinking how to get a rental property through auction or alternative means.
    Andrew Caudill Investor from New Hampshire
    Replied 10 days ago
    Just what I needed to read. ive got 6 months of cushion set aside now, now to pay off some debts and craft a plan!
    Wes Salous Investor from Oklahoma city
    Replied 8 days ago
    Great article and advise, I am on the same page and plan with you Whitney
    Michael Robinson
    Replied 8 days ago
    my wife and I are retired and have been rejcted for every single mortgage you can think of by countless lenders. So we are thinking how to get a rental property through auction so any advice on mortgages would be great
    Cherisse Buddy Investor
    Replied 8 days ago
    Everything you mentioned is great advice for starting in this industry responsibly. My partner and I feel encouraged that we're heading in the right direction, as you've validated the action plan we've put in place. Thank you for sharing!
    Suzan Hampton
    Replied 6 days ago
    Thanks for the great advice. We're nearly there with six months' emergency savings and are nearly debt free (except for a big student loan, sigh). We're taking your advice to set aside deductibles for medical, etc. We hadn't thought of that and think it's a great idea. We plan to do a BRRRR here in the KC Metro with a duplex, tri- or quad via an FHA loan and a lot of sweat equity to build value. We'll live in one and rent the others til we're at 20%, then refi, rent all the units and move on to the next one. Appreciate the inspiration!
    Calvin Waddy from Trenton, Michigan
    Replied 6 days ago
    Fantastic advice. Eye opening and sobering yet realistic. Being a goal oriented person myself I like how you set it up for success with big picture steps. Thanks!
    Bobby Romadka New to Real Estate from Maryland
    Replied 5 days ago
    Great read. Our goal is to buy our first property by the end of 2021. We are brand new. This gave me some good insight to slow down, Save, not jump the gun. TY