How much money should I save up to fund my first rental property?

24 Replies

Hello Everyone,

I am just beginning my process of becoming financially free. I am 18 years old living in Chicago and am going to college in Indiana. I have around 20k saved up and am trying to learn as much as I can now to be able to have enough money saved up to invest in a rental property. At the moment I am not sure if I want to renovate but I do know I would like an asset that appreciates. Any ideas or tips on how much I should save up before I start or tips In general? Really appreciate any responses. Thanks!

You have that backwards.  What you need to do is save up the money first ( you say your have $20k right now), then use that as your down payment, and figure out how much property you can buy.  then, go find the market where those properties exist

Originally posted by @Joe Villeneuve :

You have that backwards.  What you need to do is save up the money first ( you say your have $20k right now), then use that as your down payment, and figure out how much property you can buy.  then, go find the market where those properties exist

 So you believe that my mindset should shift to trying to find an available market with my capital right now? 

Originally posted by @Mason Adelman :
Originally posted by @Joe Villeneuve:

You have that backwards.  What you need to do is save up the money first ( you say your have $20k right now), then use that as your down payment, and figure out how much property you can buy.  then, go find the market where those properties exist

 So you believe that my mindset should shift to trying to find an available market with my capital right now? 

 Yes, but you're missing the most important step ahead of it...you need to put together a plan for investing based on your financial needs for both cash flow and personal debt payoff.

Originally posted by @Joe Villeneuve :
Originally posted by @Mason Adelman:
Originally posted by @Joe Villeneuve:

You have that backwards.  What you need to do is save up the money first ( you say your have $20k right now), then use that as your down payment, and figure out how much property you can buy.  then, go find the market where those properties exist

That makes a lot of sense, so my first step should be realizing what type of property I want and goals within that. 

 Yes, but you're missing the most important step ahead of it...you need to put together a plan for investing based on your financial needs for both cash flow and personal debt payoff.

 

@Mason Adelman - Congrats for getting going so early haha I wish I knew what financial freedom was at 18.

To answer your question, How much do you need to save......it depends on what you are going to buy and where.

Also, you'll have to figure out how to qualify for a loan if you don't have a W-2 job yet.  Let me how I can help.

Hey Mason,

Great question. It's really going to depend on what your goal is with the first property. Are you going to be living in it, or is it for rental only?

If it's a residence that you won't live in, then you will need 15-25% down. You will also need around 4-5K for closing costs which can be negotiable. You will also want to have some extra money around for CapEx/repairs/vacancies. That is for your safety, and depends on how comfortable you feel for the amount needed.

If you're looking to live in a property, you could come to the table with much less money. If you got a property with multiple rooms or units, you could take advantage of government back loans like FHA. This would mean coming up with a 3/5% down payment instead of 15-25%.


What other people are mentioning is debt:income. As a young investor this might be your biggest obstacle. The bank will want you to have a certain amount of debt:income after the loan. Somewhere around the 40%ish mark. This means that they will look at your monthly income from your job, and you will only get approved for an amount that you can pay off with 40%ish of your income plus your other debts (car payments, loans, not bills). 


I hope this helps you out a bit with what you were asking

thanks

Hey @Nicholas Mazdra , I appreciate all the advice, I think it was really useful knowledge. I think I'll continue trying to learn as much as I can now and to continue saving for when I am able to find great deals and be able to act on it. I am not too familiar with how to get a loan however and other technicalities. For example, let's say I do find a house and buy, then how to screen a tenant and all that is all a mystery. I have a lot to learn.

Originally posted by @Mason Adelman :

Hey @Nicholas Mazdra, I appreciate all the advice, I think it was really useful knowledge. I think I'll continue trying to learn as much as I can now and to continue saving for when I am able to find great deals and be able to act on it. I am not too familiar with how to get a loan however and other technicalities. For example, let's say I do find a house and buy, then how to screen a tenant and all that is all a mystery. I have a lot to learn.

 Mason,

Do you read or listen to audio books? Brandon Turner's book on buying rental property was really good for new investors. It is written in progression so that each chapter builds on the home buying/renting process. Each chapter is a new step in the process... It will take you through finding a home, financial approval, negotiating, closing, screening tenants... It's a nice and easy way to build your basic knowledge on the process 

Hey @Mason Adelman

Congrats to you for your ambition! I work with a bunch of young aspiring real estate investors just like you, and I am willing to help you out with some advice or even chat on the phone if you wish. But I first recommend you read this article I wrote for Bigger Pockets titled How to Invest in Real Estate Before Turning 21. Once you've read it, let me know your thoughts and if you have any questions. I am a high school teacher in Colorado and I am always looking to help young people get started in real estate investing or help in any way I can. Let me know if you want to chat sometime. https://www.biggerpockets.com/.

@Mason Adelman

Well done to save that much at any age! Cautious, responsible leverage is the name of the game for long term success. Don't drink the koolaid generally. Likely save 1.5x what you think you should which will equal ~5x what most books and instagram posts say you need. Do NOT over leverage. Spend $300 of that $20k on books while you continue to save and you'll do fine I bet. Anyone who saves that much at your age has a brain enough to be successful at this stuff.

It depends on your market. Figure 20-25% down +3-5% in closing costs. It also depends on the type of property you're seeking and if you want it to be in a certain area.

@Mason Adelman

David Lindhal- emerging markets

I would also read Don Campbell (these are Canadian based but highly applicable conceptually) 97 Tips for Canadian Investors as well as Real Estate Investing in Canada 2.0

Read some property management books also, Mike Butler has a good one, the BP Managing Rental Properties one is fairly good, Douglas Gray has a great one (extremely thorough but Canadian based, again, concepts applicable).

Read some renovation books. Ian Szabo has 2 that are decent enough. Michael Litchfield has a phenomenal one, literally a textbook. Covers most of everything construction you’ll need to start out.

Finally, read LOTS of marketing. Lots. Never stop absorbing this. Favourite is 22 immutable Laws of Marketing. The original not the 20 stupid updated for internet etc versions. Donald Miller, read him thoroughly. Michael Gerber - E Myth. That’s a must. Read Verne Harnish later on, give it a couple years then grab him. Read the Blue Ocean Strategy & Shift for sure. Read Scott Stratten, he’s lesser known but excellent. UNbranding as well as UNmarketing are excellent.

Lastly, get The 4 hour Work Week. It’ll be a good place to start even though it’s not real estate specific. Don’t be alarmed at the girth, it’s an easy read. The audiobook is also fabulous. If you commute to school or work, audiobooks are a great way to multitask. I will caveat that with don’t get the Scott Stratten audiobooks... he alternates chapters with his wife and her voice is like listening to cats argue. And the Verne Harnish audiobook is nearly useless due to lack of charts and graphs.

Go forth and succeed young grasshopper.

I just want to say good for you for thinking like this at 18 years old.  Where did you get the motivation from to think about financial freedom at such a young age?  Go get it!

@Justin Elliott

I would say I was always money-conscious, I think it really started to sink in when I got my first part-time job as a camp counselor. The pay was not the best of course and at the time I was investing in other markets such as shoes. I realized I could make way more through other means rather than working for a wage.

It wasn't until I stumbled upon Graham Stephan that I was really excited about the idea of passive income, and the idea of building your credit score for the future. I was actually just introduced to the Bigger Pockets Podcast and instinctively knew that I wanted to learn everything about Real Estate and being financially free from it. I do have a long journey ahead but I am prepared to learn.

"investing in other markets such as shoes". That's a hustler! Remember REI isn't really passive per se it will be a ton of work but you sound like you're game. Good Luck!

@Mason Adelman - bravo for not only thinking about your investment future at this age, but also by saving up $20k! Quite impressive! That's a lot of beer in college you held back from :-) You're off to a great start my friend...both in terms of savings, and also by taking the first step of researching and exploring what different real estate investments could look like. Regarding what makes sense and where you should focus your attention, that really depends on where you expect to land post-college. Meaning, where do you intend to grab a job? Because that is where I'd start exploring. With this being your first purchase/investment, I highly advise doing so in the market that you will end up living. There is so much to be learned as a landlord and property manager the first few years, whether you property manage yourself or oversee a property manager. I wouldn't recommend remote investing/management for your first few properties. Less control, and you will learn less about managing/investing.

Next, I would strongly encourage is a house-hack of a multi-family.  Can also house-hack a single family or bigger condo worst case, having your friends rent from you, but perhaps a 2 to 3 unit could work - depending on the town/city/prices and your savings at that point.  House-hacking a primary residence means you put less down (vs a non-owner occupied investment) and you learn more (by being on-site).  This is what I did when I was 23.....I wasn't as ahead of the game as you, but I can say it was a great investment, it started my RE career on the right foot, and I still own that building today!  Of all the investments I've made, this is far and away in the top 3 and highly recommend it!