Budgeting for first investment buy - down payment vs the rest
Starting to save money for our first real estate investment -- at this point we are still doing market research on exactly where we want it to be but in terms of a strategy I think we are going to do a short term rental (airbnb).
Hypothetically if we are able to save $50k in capital -- how much of that should we be planning to use as down payment for the loan and how much should we be budgeting towards everything else (closing costs, lawyer, furniture, improvements to unit)? Also, how much do people like to have as reserve after all that so they have money in case other things pop up?
When I first started saving all I was thinking of was using the money towards the down payment but as I've done more research I realize there are so many other factors to consider and I'm just not sure if there's a good ratio people use for this so that I can figure out what type of properties to even start looking at....with 50k saved, what would the suggestion be?
Sorry to ramble - first timer :)
Your down payment is going to be around 25% for a Short Term Rental investment. So your questions really depend on what type of budget you have for your purchase. Closing costs are going to be around 4%(ish) of the loan, depending on the loan product.
Reserves is 100% based on your comfort level, age/condition of the property, and value of the property. When I started I kept about 10K on hand for repairs etc - for a $125K Condo.
Thanks Karl - lets say we have a budget of 50k --- what would your recommendation be in terms of property value to realistically be looking at?
Also - in regards to the 25% down on the investment property -- someone had mentioned to me that its possible to get a 10% rate if you are buying it as a 'vacation/2nd' home and that if you go that route you can still AirBnB because there is no requirement that you live in it. Is this accurate? I will start talking to lenders once I have more saved but any insights around this are appreciated.
Thansk!
Welcome to the community! Your in the right place. Where to start is always the big question. So many directions and factors to consider its easy to get overwhelmed and turned around. The first move is to get pre approved! This will determine if you need to put 20% down or possible using a low down payment conventional loan of 3% (assuming your not going FHA rout). This factor alone will give give you a very good idea of what you can afford and what market you can afford. Is the property turnkey? or does it need $30k worth of rehab?
These will be the biggest factors. then you will need money for closing costs.
As for reserves. Its always good to have reserves. What if the furnace breaks? can you shell out $10k?
Make sure you have some cushion money and that the deal will cashflow and your also taking vacancy into account. How long can you have vacancy?
Before looking at potential investments you need to understand how airbnbs operate inside and out.
Hope this helps. Best of luck to you! keep going!
Quote from @Eric Parker:
Thanks Karl - lets say we have a budget of 50k --- what would your recommendation be in terms of property value to realistically be looking at?
Also - in regards to the 25% down on the investment property -- someone had mentioned to me that its possible to get a 10% rate if you are buying it as a 'vacation/2nd' home and that if you go that route you can still AirBnB because there is no requirement that you live in it. Is this accurate? I will start talking to lenders once I have more saved but any insights around this are appreciated.
Thansk!
Yes there are 10% down financing options for STRs as you mentioned. I also know a lender that offers 5% down for a 2nd home/vacation property. I'm not entirely sure of all the requirements involved though. PM me if you want me to connect you with him.
All I used was down payment and closing costs. I bought a LTR and didn't need to furnish the place and the house was turnkey. What kind of investment are you looking to buy?
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@Eric Parker I think a good rule of thumb is to have 3-6 months' worth of expenses in the bank at all times. This would be per property, so as you scale up you start to build up larger cash reserves. You will need these more often than you realize as the cash flow from your real estate will not be a simple thing like in a spreadsheet. For six months you will crush it, and then one month you will have a bad thing happen. In real life that is how it works.
