What to do with money while saving for a downpayment?

Question

I'm brand new to this forum and I'm amazed at how supportive this community is of one another. I'm about 100 podcasts in on both Bigger Pockets podcasts and the How to Money podcast combined, plowed my way through the Rich Dad Poor Dad and Set for Life books, but I haven't come across the information of what to do with money when saving up for a down payment on a rental property in the Milwaukee area. I have about $15k sitting idle in a savings account, which I've learned is not using it effectively. I need the money to stay liquid for when I reach that point of knowing how to spot a deal. Any suggestions are appreciated!

Andre Debs · Answer

I use Marcus by Goldman Sachs. 2.25%, FDIC insured, and as liquid as I need it to be.

Michael Ealy · Answer

Mike,

One idea is putting up an LLC and then opening a secured business line of credit using your $15K as collateral. Your $15K can be put in a CD that earns 2% and then your business line of credit will charge you 5% when you use the money when you have a deal you like to make an offer on. You can just write a check from your secured business line.

The goal here is to build your LLC's business credit so that eventually, you can open an unsecured business line for $40K or more.

Your $15K will not really earn money doing it this way. However, the objective is to get an unsecured business line of credit so that you can get more money with low interest rate under your LLC's credit (so it does not even appear on your personal credit unless you default).

You can buy more houses with $55K total credit vs. only $15K. Also, if it takes you a while to find a deal, your money is not sitting in a checking account earning you 0. Your money is earning 2% and at the same time, building up credit for your LLC.

Marcus R. · Answer

Welcome @Mike Koscielak!  I'm still fairly new myself.  I have an MBA w/ a concentration in finance so I've always been a paper asset guy and below is what I personally do, but am no way qualified to give financial advice so do your research first and check with a qualified financial professional if you have one.

So while saving up for down payments instead of keeping that money in a savings account I invest it in the market. Usually 60% in stocks and 40% in low cost ETFs through Etrade.  Sometimes 80/20, I try to get as aggressive a possible to grow the money but then scale back to 60/40 or 50/50 etc...as I get closer to my target amount to mitigate the risk.  They have a lot of ETFs that have no transaction fees and just 30 day hold periods so that you can pull money in/out pretty frequently.  The ETFs are a lot less volatile than stocks so I'm a believer in them and they should get you the 6%-7% annual return after their minimal fees and with minimal work.  If your time horizon is long enough you can also explore the bond market.  Might even try CDs and some high yield accounts as well but I'm not a fan as I don't think the returns are high enough.  Regardless, I think most options are better than just keeping the $15K in your savings account because at minimum you're losing money every year due to inflation so you need to do something to at least outpace that.

Andre Debs · Answer

Just remember that when opening a LLC, there will be associated expenses for it.

Michael Ealy · Answer

Any bank will do it.

It's called a SECURED line of credit under your LLC. You open a bank account with them. Open a high interest CD. Then open a secured LOC with that CD as collateral. In the beginning though the bank will base their LOC on YOUR PERSONAL CREDIT. Once you've demonstrated you pay on time, your LLC now has credit and now you can open an unsecured LOC under your LLC's name.

This is a process. Not instant. If you have bad personal credit and no banks will lend you money, you need to solve that problem first.

Justin Miles · Answer

@Daniel Kong I didn’t catch the downturn part of your post. If OP were to go this route he would need proper risk management and maybe even break even stops. For him I would recommend a liquid saving or cd with low or no penalties. Timing the market takes a lot of skill and even those skilled  get it wrong more than not they just make sure the wrongs are small and the rights are big.

Daniel Kong · Answer

@Justin Miles - You are right, its theoretically always liquid. But if you bought in for 15k, and now your stocks are worth 13k, you will probably not pull them out until you at least get back to even (if you even do depending on what you bought)

Charles Kao · Answer

@Mike Koscielak @Michael Ealy

In theory that sounds correct but in reality business credit is really probably not going to be established because alot of companies do not report that issue these.  Alot of companies say they do but if you read fine print they could or only do on default.  I used to tell clients this when I worked in commercial lending at multiple institutions doing this very same thing and working capital line of credits

before I found out it was not the case. Your best bet in getting business credit doing this is simply with the institution you get it with.  Most

businesses will do not do a secured line of credit for more than you putup

so not sure where you are getting 50k from. I would just do the high yield savings and focus on growing your money by more than 2.25 percent depending on what you think you need to invest.  15k should be enough to get

something so focus on the strategy to get that money growing or to save more.

Justin Miles · Answer

@Daniel Kong not true you can certainly go liquid with your stocks if your not invested in a 401k or  ira and you can also use margin if you know what your doing. My money is in cash waiting for the s&p to touch 3000 and then I’m going short the s&p. But that’s not advice just what I will be doing.

What to do with money while saving for a downpayment?

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