Best Route to Save Money for First Deal

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Best Route to Save Money for First Deal

Kurt Kline
Irvine, CA · Member since 2015 · 10 posts · 8 votes

Hello,

I started researching real estate a few months ago. I have read a few books, listened to the BiggerPockets Podcast, and attended a local real estate meetup. I am 23, and I just started working at a tech firm about a 1.5 years ago. Currently, I have about 27k in my savings account, and some change in my Roth 401k. 

My question is: What is the best way to save up money for my first deal? FYI I am hoping to score either a 3 or 4 unit multi-family home that I can live in and hopefully live rent free. I just read Investing in Duplexes, Triplexes, and Quads by Larry Loftis and I believe he proposes an excellent strategy. 

I know that I can save capital by just piling it up in my personal savings account, but my gut tells me that that idea isn't very smart since my money isn't growing at all. I would like to invest more into my personal 401k and create an IRA, but I also don't want to limit my chances to invest in real estate if those types of accounts create complications.

I am hoping to acquire my first property within the next 2 years. I read a few posts regarding a Self Directed IRA/401k, but it seems that maybe that is a better strategy if I already have more money in my IRA/401k? Or maybe there are options I am not even considering.

Please let me know your thoughts, BiggerPockets community! 

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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
10y

Saving up for your first property is a choice. While there are many games you can play, including borrowing against a 401(k), partnering with someone with cash, working with seller financing, and using equity from your personal residence, the harsh reality is this:

If you can't aggressively accumulate money every month, you probably won't succeed in real estate.

If you want to buy real estate out in Cali, Bro, you are probably going to need to be WAY more aggressive than the rest. I'm talking $5,000+ per month if you can, and that will probably get you into a respectable duplex, triplex or quad in a year or two in a good part of town.

Now, it sounds like you understand that and the question you pose is how to invest that money in the short-term.

I believe that there are two philosophies - one is to keep the cash liquid. In that case, you can keep it in a savings account, or in a money market account. Either way, you lose to inflation.

With the significant sums of money that you are going to need to save, and the significant (1-2 year) timeline that you've got going, I'd be putting my money (and I am) into index funds. Yes, I lost 10% over the last year or so like everyone else, but I'm fine with that, because I believe that over a lifetime, my strategy is likely to produce that 10-12% annualized (nominal) real return that index funds have historically provided.

This won't work for everyone, but if you can accept that you are doing the statistically right thing with your money, you can swallow that 10% loss, knowing that in the long-run, it will probably be the correct place to park your money.

My strategy is simple. I have ~$7K for personal expenses and about $15K in a cash reserve to be used exclusively for real estate business related work/repairs, etc.

Everything over that goes into index funds. VTI, VOO, etc. I liquidate when I buy. Sometimes I'll lose, sometimes I'll win. If history continues to be a good barometer, my savings will earn ~11%.

Podcast Guest on Show #223
BiggerPockets
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  • John Van UytvenPro Member
    Property Manager · Oconee, IL · Member since 2014 · 536 posts · 202 votes
    10y

    When it comes to investing with you 401K/IRA. Talk to a professional.

    As far as the rest, where you think it will take 2 years to get a place. That is a good time frame. Save look into first time home buyer loans.

    You know it is not going to happen over night.

    Now you just need to plan accordingly. 

    What will I do today, that will pay off in 2 years?

    Know your budget. If you don't know where every penny is going then you find it harder to meet your goals.

    0Reply
  • Kurt Kline
    OP
    Irvine, CA · Member since 2015 · 10 posts · 8 votes
    10y

    Hi @John Van Uytven

    My question is less about how to invest in 401k/IRA accounts. My question is in regards to the strategy of where to put my money in order to grow it the fastest while still being able to access it when I need it in order to invest in real estate in the near future.

    Option 1: I invest my money in 401k/IRA accounts, but it may be more difficult to extract that money in order to invest in real estate

    Option 2: I keep piling my money in my savings account and I have easy access to it when I need it; however, the value of my money is decreasing because I am losing to inflation

    Option 3: ??? Maybe there is a best of both worlds option where my money can grow but it is still very liquid

    Thank you for your reply. 

    0Reply
  • Helen Zhang
    Austin, TX · Member since 2016 · 160 posts · 39 votes
    10y

    Hi Kurt, 

    I had the exact same question when I was at your age. 

    About your 401k: I have just learned that you can invest 401k on real estate by using self-directed ira. I personally think the paperwork and legal documents is too much of a hassle for me, so I just left 401k alone to grow by itself. 

    About your savings: There are ways to increase your savings by creating a high yielding saving account that gives you 2%~3% return per year. (You can look up on the internet to find a few, or I can refer you some with small referral bonus). This is risk free unlike stocks, and it is a checking account so it is as liquid as you can get. 

    You obviously have the choice to do investment, but I wouldn't recommend to do stocks unless you know it well. There are less risk investment such as p2p lendings. I personally like propers.com. If you choose to do prosper.com, your money will not be as liquid as stocks. This means you will not be able to cash out as easily as stocks. 

    Good luck =) 

    Helen Z

    0Reply
  • John Van UytvenPro Member
    Property Manager · Oconee, IL · Member since 2014 · 536 posts · 202 votes
    10y

    @Kurt Kline

    Sorry about that then, but I am not an expert on 401K/IRA investing.

    I would say a regular savings account would be good. Yes you will loose some due to inflation, but putting it in a 401K/IRA for 2 years is putting it more at risk.

    Third option, become a private money lender.

    It pays better than a savings account and done correctly could get you what you want in a secure return. With short term.

    Hopefully that helps more.

    0Reply
  • Kenneth Bassett
    Marion, IL · Member since 2016 · 3 posts · 2 votes
    10y

    @Helen Zhang I'm a newbie to real estate, but I've done my homework on retirement accounts. Kurt definitely does not want to use a self directed IRA for this plan. There are very strict rules on how you manage the investments held in these accounts, including the owner or the owners next of kin cannot use the property, sweat equity is restricted if you can contract the work out. That's the only two I can think of off the top of my head, but please reference @the Radical Personal Finance podcast episode 143.

    @Kurt Kline, I'm sorry but there really isn't a good short term investment vehicle these days. A good Vanguard prime money market account can get you about 1 percent, and there are online banks that offer about 1 percent. With inflation at dang near zero the past 2 years, I think you're safe to say both of these vehicles would stay ahead of inflation. Anything more than these you will just have to pay to much in penalties to get at your money.

    Stay positive Ken. OK, I can think of one thing. IF you are careful, you can contribute to a Roth IRA. Invest the principle/contribution in a high yeild investment of your choice. Then when you need the money you can pull out ONLY THE PRINCIPLE. You will get taxed and penalties if you pull out the gains. At least your money will stay clear away from inflation, this also makes a good vehicle for emergency funds.

    Cheers, Ken B.

    1Reply
  • Kurt Kline
    OP
    Irvine, CA · Member since 2015 · 10 posts · 8 votes
    10y

    Thank you all for your input.

    @Kenneth Bassettthank you for synthesizing all of the different responses and adding your own take. I think the Roth IRA might be a good way to go for now. :)

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    @Dmitriy Fomichenkocan likely advise on the ins and outs of investing retirement funds in REI. There are definitely some intricate restrictions with doing this that make direct investment in RE a challenge (I won't go into gory detail unless asked) ... therefore, I think that notes, hard money loans, or private placements are the way to go for retirement REI investments.

    Another poster mentioned a strategy that I employ ... I keep my emergency funds in my Roth IRA. If I have a sudden need for cash, I can pull out my principal tax and penalty free. If not, it stays in a tax advantaged entity where others can't touch it.

    I'm old school in that I just saved my down payment up. I reverse engineered how much I'd need and then continued to reverse engineer to save it ... what I mean is I would find out how much of a mortgage I could qualify for with my income, then I would reverse engineer how much of a down payment I would need to save to put down on that property (20% for me, again, I'm old school). Then, I'd further reverse engineer ... I'd figure out what all the mortgage and expenses were on such a property, and assume a max vacancy rate I'd want to be able to survive, and back out the carrying costs in that worse case scenario. For example, if I wanted to buy a single family home and rent rooms, I'd figure what the expenses would be and all the rooms vacant (no rental income). Then I'd subtract my current rent and have the difference auto deposited into my savings account. That way, I could validate that I could consistently cover worse case expenses AND save money for the investment at the same time. Adjust and iterate as necessary. To summarize, start at the end, reverse engineer to the present, then execute to the future, adjusting along the way. Inflation is not so high right now, and cash can be quickly deployed if it becomes an issue.

    Stocks and bonds are very liquid and still grow, but the problem is that the best REI deals normally appear around the same time stocks tank.

    0Reply
  • Logan Turner
    Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
    10y

    @Kurt Kline

    Hey Kurt, I've thought about the exact same thing. I'm able to save money fast, but would rather have the money doing something over 6-12 months, than sitting in a savings account. I looked into crowd funding and other hard money lending services, but haven't taken a dive yet. You can put like 5 k in for 8-15 percent return. Seems interesting. 

    If you know the area you would want to invest in, why not try networking and syndicating on a deal or providing some money to a fix and flipper for a 6-12 month loan yourself? you could charge 1-2 points and 8-10 percent probably.  20-30 k is about what is needed for repairs. Just an idea. It will also give you more insight into the RE game.

    0Reply
  • Jason Smith
    Flipper/Rehabber · Kalamazoo, MI · Member since 2015 · 34 posts · 22 votes
    10y
    Kurt Kline I would definitely talk to a pro about that IRA/401k their are some huge penalties if you don't follow certain protocols within those types of Financial vehicles. But going forward, 27k is a great start when investing in RE. Doing something l call a neat/cute (buying it at a wholesale price then a little neat cleaning and a cute paint job under $900 bucks for a 1200sqft home then selling it to a end user) rehab. It works wonders and adds any extra 5k to ur bottom line. Let's say: ARV: 40k Repairs: 15k PP: 10k (CC of 10% ) $11k N/C: 900 Quick Profit: $5k Flip to E user: 20k with closing costs (not using a realtor in this example) **you settled at 19k net to you making you that 5k plus some change. I know this seems like a process but I did this several times just at 5k profit and in one month made 75k...what do they say rinsing repeat...just my 2cents
    1Reply
  • Dolly Caswell
    Investor · Eagle River, AK · Member since 2015 · 121 posts · 45 votes
    10y

    @David Faulkner, you are amazing!! No doubt your car is clean as well. Good for you, we should all think further ahead as you've described. I get caught up in the passion of "the deal" and want to fly into doing something about it. Fortunately, I'm debt free and can...now if I could just find some deals in Alaska.....

    1Reply
  • Dolly Caswell
    Investor · Eagle River, AK · Member since 2015 · 121 posts · 45 votes
    10y

    @Kurt Kline, how does one become a "private money lender"?

    0Reply
  • Stone Teran
    Investor · Cincinnati, OH · Member since 2015 · 374 posts · 120 votes
    10y

    Most people who want to buy rental property never do it because they don't know how to save.  They always spend every dime they have because they have "guaranteed" money next Friday.  They rationalize that their cable bill, car note all HAVE to be paid.  Yes, but you don't need 200 channels and a new car in the first place.  And when that person gets a raise at work, it doesn't take long to spend the extra money on new crap they think they need.

    So my point, Kurt, is that although you don't seem like the person I just described, most of your focus should be on savings and not on investing your savings.  Not spending is more lucrative than the stock market, unless you have a crapload of money to invest.  With that said, do invest your money and hope the Dow helps you out.  Having a solid pile of cash goes a long way in making your real estate investing a success.

    PS-Keep your money out of your retirement account if you need quick access to it.

    0Reply
  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    10y

    Saving up for your first property is a choice. While there are many games you can play, including borrowing against a 401(k), partnering with someone with cash, working with seller financing, and using equity from your personal residence, the harsh reality is this:

    If you can't aggressively accumulate money every month, you probably won't succeed in real estate.

    If you want to buy real estate out in Cali, Bro, you are probably going to need to be WAY more aggressive than the rest. I'm talking $5,000+ per month if you can, and that will probably get you into a respectable duplex, triplex or quad in a year or two in a good part of town.

    Now, it sounds like you understand that and the question you pose is how to invest that money in the short-term.

    I believe that there are two philosophies - one is to keep the cash liquid. In that case, you can keep it in a savings account, or in a money market account. Either way, you lose to inflation.

    With the significant sums of money that you are going to need to save, and the significant (1-2 year) timeline that you've got going, I'd be putting my money (and I am) into index funds. Yes, I lost 10% over the last year or so like everyone else, but I'm fine with that, because I believe that over a lifetime, my strategy is likely to produce that 10-12% annualized (nominal) real return that index funds have historically provided.

    This won't work for everyone, but if you can accept that you are doing the statistically right thing with your money, you can swallow that 10% loss, knowing that in the long-run, it will probably be the correct place to park your money.

    My strategy is simple. I have ~$7K for personal expenses and about $15K in a cash reserve to be used exclusively for real estate business related work/repairs, etc.

    Everything over that goes into index funds. VTI, VOO, etc. I liquidate when I buy. Sometimes I'll lose, sometimes I'll win. If history continues to be a good barometer, my savings will earn ~11%.

    Podcast Guest on Show #223
    BiggerPockets
    5Reply
  • Peter S.
    Rental Property Investor · Denver, CO · Member since 2015 · 63 posts · 8 votes
    10y

    @Kurt Kline,

    A lot of good ideas being discussed on here. I'm in a similar situation as you in that I'm trying to save for my first deal and looking at different savings or investment vehicles out there to be able to make that first down-payment later this year. In my experience thus far, there aren't going to be a ton of great options where you are going to get a significant ROI while still keeping liquidity.

    One thing I am doing is investing heavily in my Employee stock purchase program (ESPP) as i can buy shares at a 10% discount 4 times per year then turn around and immediately sell to keep the profit. I'll pay some taxes, sure, but I'm still coming out with about an 7-8% return each time and this money is about as liquid as it gets, short of a savings account. 

    This might not be an option for you, so I'd also echo what someone mentioned above about P2P lending. You can do shorter terms loans and still make a respectable ROI if you invest intelligently there. I'm going to be looking into that further after I sell off my ESPP shares next week.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    10y

    My strategy is that I max out my Roth IRA every year and take advantage of my employer matching. Roth is nice because it is taxed before it goes in and comes out tax free. Some people put all their money into real estate. I like to diversify. Retirement accounts for the most part cannot be touched if you file bankruptcy. If something horrible happens and I have to file bankruptcy, I still have a nest egg waiting when I get old. Nobody plans to file bankruptcy, but in the rental business there is risk.

    Some people like index funds. I am personally invested in several hand picked stocks. Some are high dividend and some are growth. I manage it myself. I fired by investment broker years ago after he lost 40% of my money and shrugged it off. He pretty much said, oh well it happened to a bunch of people. I pulled all my money the next day. Some brokers present annualized returns in a deceptive manner. The problem with mutual funds in particular is they get paid even in years you lose money. I still believe if you invest in good companies that putting a portion of your money in the market is fine. 

    I am also starting to observe that everyone is leaving the stock market to get into rental properties, that could be an opportunity to invest more in the market. There is good advice that says go the opposite direction of the herd.

    Please do not take this as investing advice. Do your own research. 

    1Reply
  • Nick Alvarez
    Orange, CA · Member since 2015 · 16 posts · 5 votes
    10y

    @Kurt Kline Like a lot of people are stating above ^^, their are multiple ways to save up for your first deal. yes there are less aggressive ways to save (online savings, MMA accounts, ETF's) or more aggressive (crowd-fund platforms, private money lending, day trading). However, I think it comes down to how bad do you want to get in the REI space & what are you willing to do to, in order to make it happen.

    From a practical standpoint- I'm surprised no one has suggested getting a second job. I worked 8 years in serving tables in a restaurant from high school through college. After graduation I got a job in commercial finance- but chose to keep serving tables at night for a year and half because I was motivated to save for my first real estate investment, this was an easy way to stash away an extra $1500-$2500/month just by sacrificing some nights and weekends.  Also- every time I've gotten a raise, I haven't adjusted my spending habits, rather just increased my savings amount. 

    I like what @Logan Turner suggested- check out the crowdfunding platforms and asses your risk-tolerance, learn about secured/unsecured debt & see if there are some short term deals you could be apart of. Or teaming up with other investors who need some rehab cash (albeit more prone to risk than online savings)- this would give you first hand experience in the REI world & provide a healthy return.

    Lots of fun ideas out there, just requires time, patience, & discipline- since we're practically neighbor's- feel free to pm me if you ever want to meet up and chat real estate.

    1Reply
  • Account Closed
    Investor · Abbotsford, British Columbia · Member since 2016 · 24 posts · 3 votes
    10y

    Saving for downpayment- my husband & I are exploring being a hard money lender & the creative real estate investing strategies like bird-dogging etc. here in Canada. We're from Vancouver... would love to meet & hangout with local investors here in BP! Thanks & God bless you all :)

    0Reply
  • Ben StoodleyBusiness Member
    Lender · San Diego, CA · Member since 2014 · 264 posts · 161 votes
    10y

    Hi @Kurt Kline - you're smart to start so early, and are in the right places to learn. There has been a lot of talk about 401k and other savings instruments, all very good options. IN MY OPINION, it all comes down to your personal financial situation and risk VS return strategy. If you want to yield double digit returns, investing in real estate is your safest bet. The younger you are, the more risk you can afford to take, technically. I personally do not like crowdfunding sources because the people themselves play a large factor in the project. I only like to work with people that I know are capable of doing very good work and experienced, hence, I only work with people I know in person and can trust. I then give them however much money to invest in their real estate deals. Essentially the same idea as crowdfunding but really just Joint Venture investing. This is a great way to gain experience and make your money work for you at the same time. Experience is key in my opinion. I think Real Estate is by far the BEST investment vehicle available, safest and biggest returns due to leveraging and other tools. So if you can invest in real estate projects with others that you trust, why not just do that? Yes, it is more risky than 401k's, savings, cds, etc, but there is no reward without risk, and this is the business you are entering. Just my 2 cents. Hope it helps.

    1Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    10y

    Don't wait 2 years to buy a property.  Ramp up and get it now.  Taking your time, slowly saving and hem hawing is for average results.  Go all in and put the capital down on a property now, find a lender that will work with you.  I went all in in 2008 and never looked back.  To get you going you need to align yourself with the right friends and mentors to get you jump started.


    Franklin

    0Reply
  • Kurt Kline
    OP
    Irvine, CA · Member since 2015 · 10 posts · 8 votes
    10y

    Wow, thank you all for dropping such a diverse set of knowledge on me. I now know more than enough strategies to save up money for my first deal. Much appreciated. 

    @Nick Alvarez Thank you for the offer. I will be in touch. 

    0Reply
  • Bob Dee
    Investor · Huntington Beach, CA · Member since 2016 · 3 posts · 1 vote
    10y

    @ Kurt Kline In reading this thread, I agree with many of the ideas here but disagree with some. 1st disagreement is talking to a professional about 401K investing. I did this all myself and it was not that difficult, except for converting my 457 into a (simple IRA) 401k. This is where the so called "professionals" did everything in their power to block what I was trying to do because it was money out of their pockets. Now, I must qualify by saying this was over 10 years ago when this process not as mainstream as it is now, heck I just saw a guy saying on TV that he has a secret for OPM for RE investing and guess what it was??? Yep, using a 401K or someone else's. Brilliant! Maybe I should get an infomercial going with the same info. I digress. The custodian you use for 401K investing for RE will explain the IRS rule called "self dealing". It is not that hard to understand and I know you can do it because I did.

    I also recommend staying clear of CFP's  not to begrudge any ones profession but since you are on this site it is clear to me that you are a DIY type.  CFP's will erode your savings by fees nearing 2% that compound.  Go online and use a compounding calculator and plug in your numbers and watch 2/3 of your money disappear over time.  

    I agree with reverse engineering expenses vs income or simply budgeting, as well as 2nd income.  That is how I started in CA RE many years ago.  But the biggest thing.......STOP SPENDING!  I drive a 16 y/o truck and have no payments on any depreciating assets.    This is another compounding strike against liquidity accumulation.  I learned this many years ago from Ross Perot's book, since you are 23 you may not know of him.  I will not comment on all the other strategies mentioned here to keep this short, except to say, in CA you need much more cash than in other parts of the USA.   Do the things I mentioned and watch your savings accumulate, I promise it will become an obsession if you are disciplined.

    1Reply
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