Whats your plan for saving for a rental property? What has worked? What hasn't?

Question

Hey everyone, my name is Garrett and I’m located in eastern Iowa. I’m 21 and have been working full-time for the past three years. Last year I made about $80k before taxes, and my main goal this year is to save $25,000 to go towards my first investment property that Lord willing I will buy next year.

I can't remember where I saw this but this was the strategy they provided (I believe in the context of a BRRRR):

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Down Payment: 20% of purchase price

Rehab Costs: $25,000

Closing Costs and Fees: 5% of purchase price

Holding Costs: Property taxes, insurance, utilities, and interest during rehab $3,000

Contingency Fund: 15% of rehab costs

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This sounds great in theory, but based on real experience does anyone have any recommendations or revisions to this?

Are their costs that this doesn't account for?

What has worked for you and why?

Thanks!

Bo Smith · Answer

Garrett, at 21 with 80k income you're in a solid position to move fast. That framework is missing a few line items though. You're not accounting for: appraisal costs (00-500), title insurance (00-800), earnest money that might not come back if due diligence kills the deal, and most importantly -- contingency for things you can't predict on a rental property you've never owned.

For a BRRRR, your math should be: down payment + appraisal + title + inspection + 2-3 months of holding costs BEFORE rehab even starts (lender won't fund immediately). Rehab contingency at 15% is realistic. But your 5k might work if you're targeting a 0-120k purchase in a Midwest market. That's doable. The key: find a property where the numbers work on a 20% down payment with a standard bank loan, not a hard money deal. Hard money makes it tougher when you're bootstrapping.

Are you planning to fund this through all cash savings, or are you factoring in any leveraged down payment assistance or first-time buyer programs in your state?

Garrett Crosby · Answer

At 21 with $80K income and a focus on Iowa/Midwest markets, you're in a genuinely strong position — a lot of people don't get here until their 30s.

The framework you found is a reasonable starting template, but there are two things it consistently underestimates: rehab cost overruns and actual holding time. In practice, first-time investors almost always run 20-30% over their rehab budget because of unforeseen issues (plumbing, electrical, structural items hidden behind walls). Budget for that rather than the idealized 15% contingency. And on holding time, a BRRRR typically takes 4-6 months of actual project execution even if the original estimate was 60 days — bank stabilization requirements and appraisal timing add months you don't see coming.

Alioune's house hack suggestion is worth serious consideration. In your market at your price point ($100-150K range), a 3.5% FHA down payment on a duplex keeps more cash in your pocket for contingencies, you get to live in the unit while doing the work, and it qualifies for owner-occupied rates. That's often a cleaner first play than a cold BRRRR where everything has to work perfectly.

Keep going — you're building the right foundation. Feel free to reach out if you want to talk through numbers on a specific deal.

Jeremy Horton · Answer

Personally I'd invest in the stock market and take a margin loan for your rehab and downpayment. Open ended @5% f/ 50k right now. Don't ever sell your stocks, just take a margin loan. Pay down the margin loan to reduce risk if you'd like.

This way you keep your money in the market to keep making $. Deduct the margin interest and let the cashflow pay down the margin loan some to reduce risk. Then you get the depreciation and the related RE deductions on money (the margin loan) that isn't yours, you didn't work for and you didn't pay taxes on.

Oh, and if you haven't done a rehab before, take whatever you think and double it.

Jonathan Chan · Answer

It really depends on your goals. If your goal is financial independence, I would not buy. If you enjoy your work and are looking at real estate as savings, then buy. I started off with buying real estate and did the BRRRR method. I did that when rates were at historic lows so it was pretty easy to find something that cash flowed. However, I didn't take into account all the headaches of buying and holding, crappy PMs, etc. For that reason, I switched over to lending and will resume buying again and treat it as a savings account and not income.

Kerlous Tadres · Answer

@Garrett Keith, from my experience that framework is close, but I would budget holding costs by month (rehabs almost always take longer) and add money for leasing/turnover and a few “surprise” repairs like sewer or HVAC. If you pad your rehab contingency to 20% when you’re new and underwrite for an extra 1–2 months of carrying costs, you’ll avoid the cash crunch that kills most first BRRRRs.

Garrett Keith · Answer

@Bo Smith

Thanks for the response!

I plan on saving up for any and all expenses, so the only borrowed money is the home loan itself and so no assistance programs of any sort. I don't plan on using a hard loan as well.

So all in all I should be accounting for: down payment, appraisal, title, inspection, 3 months of holding costs, closing costs, additional fees, and rehab funds.

Joe Villeneuve · Answer

First, ignore what you wrote above.  All properties are different; thus all deals/terms are different.  It's all about the numbers with $$$ in front, and not about the numbers with %%% behind.

How do/did I get the cash for my next downpayments?  From the previous property's equity build up.  Not from refinancing, from selling.  Cash flow allows you to hold a property until the equity is increased from appreciation equal to the original equity when you bought the property.  The original equity might be only the equity you buy from the DP.  That grown equity should be double what you started out with and will allow you to replace the original property and buy another.

Repeat this, and you can/will grow fast with continuous profits.  It's the gift that keeps on giving.  The only cash you will need comes from you and your frozen cash called equity.

Whats your plan for saving for a rental property? What has worked? What hasn't?

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