Where should I save my money before I invest in a property?

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Where should I save my money before I invest in a property?

Michael Lee Gundersen
Hollywood Park, TX · Member since 2017 · 8 posts · 5 votes

Hi Fellow Members!

This is my first post and my first month of being on BiggerPockets and I am so excited about all of the things I've learned from all of the podcasts, forum posts and blogs I've read so far. I am SOLD on this mindset and am trying to absorb as much information as I can before pushing forward into the decision-making time of buying my first rental property. My wife and I currently have about $10,000 in liquid savings, $20,000 in stocks, $130,000 in 401K and about $40-50K in equity in our only home, our current residence. We have the capacity to save around $4,000 a month or so from my paychecks and want to begin saving as much as possible for a future down payment on our first property. With this savings growing quickly, where should we keep our savings to get some kind of a return in the meantime while I crunch numbers, read books and absorb as much as I can before making that first decision? We're currently doubling our mortgage payment, should we stop? Thank you so much in advance for any advice any of you can offer!

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Bernard ReiszPro Member
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
9y

@Michael Lee Gundersen@Don Aleshire

All else equal, local is always preferable for any form of RE investment, provided that the local market presents attractive opportunities. You may want to look into tax liens, private lending, etc. in whichever area you intend to purchase RE. Private lending, in particular, can get key connections for subsequent RE investing.

All those options present, however, present opportunity and risk - which to some extent go hand-in-hand. With proper networking, education, and hands-on involvement, you'll be equipped to make your own decisions. You're on BP which is the best place to start and has a wealth of helpful info and participants.

Regarding @Scott Trench's great post that was referenced, "Where Should You Invest the Cash For Your Next Down Payment?", I would not encourage the use of the stock market if you're plan is to use those funds for RE. Index funds are great for long-term investors, potentially terrible for those with a short time-horizon. You will not lose money in index funds - unless you sell your shares when the market is down. When will it go down? Up? Who knows! That's the premise that underlies indexing. Over time, the stock market will provide healthy returns, but it comes with lots of volatility (ups-and-downs). Indexing is great if your committed to the stock market or are OK deferring your RE plans, if the market drops.

RE can beat the stock market because the RE investor can put in the time and effort to influence the investment outcome - which can't be done in the stock market.

[email protected]
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  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    9y

    what interest rate is your mortgage?

    What are you TOTAL monthly expenses including gas, food, gifts, movies, mortgage, dinners out etc?

    How much extra have you been paying on your mortgage each month?

    0Reply
  • Bernard ReiszPro Member
    CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
    9y

    @Michael Lee Gunderson 

    You're best bet - if you'd like to get decent returns - are real estate related investments, such as private lending, tax liens, and mortgage notes. 

    Those will give you real estate experience and good returns, without the volatility of the stock market - assuming proper due diligence. 

    Stock market is not a good place for money that your planning to use relatively soon and bond funds, CDs, and money market funds don't offer much ROI.

    [email protected]
    0Reply
  • Michael Lee Gundersen
    OP
    Hollywood Park, TX · Member since 2017 · 8 posts · 5 votes
    9y

    @Michael Plante We live entirely off a base salary after taxes of $4562 a month ($1000 mortgage, prop taxes, insurance, food, vacation savings, etc) and I also make about $5000 a month in commissions. We pay $750 extra towards the mortgage and have annually made $5000 or $6000 additional payments to the mortgage (4% 30 yr fixed). 

    @Bernard Reisz Thank you for that info, I appreciate it! Where do you recommend finding some of those options locally (or does it matter if not local) and how to vet them without much financial experience? 

    0Reply
  • Don Aleshire
    Chicago, IL · Member since 2017 · 44 posts · 16 votes
    9y
    Hi Micheal This is such a good question you are asking, I think about it all the time myself. Scott Trench had a good article about this exact topic recently, below is the link. https://www.biggerpockets.com/renewsblog/invest-cash-saving-payment/?utm_source=newsletter To summarize, there are three options he gave. Savings, CDs and Index Funds. Good quick read hope it helps!
    0Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    9y
    Originally posted by @Michael Lee Gundersen:

    @Michael Plante We live entirely off a base salary after taxes of $4562 a month ($1000 mortgage, prop taxes, insurance, food, vacation savings, etc) and I also make about $5000 a month in commissions. We pay $750 extra towards the mortgage and have annually made $5000 or $6000 additional payments to the mortgage (4% 30 yr fixed). 

    @Bernard Reisz Thank you for that info, I appreciate it! Where do you recommend finding some of those options locally (or does it matter if not local) and how to vet them without much financial experience? 

    Personally I would stop making extra payments on my mortgage

    I would wait until I had 6 months worth or expenses before using it for real estate investment

    1Reply
  • Michael Lee Gundersen
    OP
    Hollywood Park, TX · Member since 2017 · 8 posts · 5 votes
    9y

    @Don Aleshire Thank you for the link, I'll definitely check it out! Looks like we're in similar boats as far as experience and drive! I wish you all the best of luck and am excited to see you achieve your goal by 40.

    0Reply
  • Michael Lee Gundersen
    OP
    Hollywood Park, TX · Member since 2017 · 8 posts · 5 votes
    9y

    @Michael Plante Makes sense, thank you for the help!

    0Reply
  • Don Aleshire
    Chicago, IL · Member since 2017 · 44 posts · 16 votes
    9y
    Thanks Michael for the kind words, best wishes and luck to you as well! Good news is that with a community like BP, it makes it easier for us to succeed!
    0Reply
  • Steve C.
    Las Vegas, NV · Member since 2017 · 89 posts · 52 votes
    9y
    Michael Lee Gundersen I second to stop paying down your mortgage. Add this cash to your investment account where it will soon get you way more than 4% return when you have a good down payment. I'm paying extra on mine currently, but only because I have PMI (loan acquired in 2012) that will drop off in November and stay fixed at 3.5% where I will stop paying it down & dump more into my down payment account & get better COC returns. 3.5, even 4% is cheap money!
    1Reply
  • Bernard ReiszPro Member
    CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
    9y

    @Michael Lee Gundersen@Don Aleshire

    All else equal, local is always preferable for any form of RE investment, provided that the local market presents attractive opportunities. You may want to look into tax liens, private lending, etc. in whichever area you intend to purchase RE. Private lending, in particular, can get key connections for subsequent RE investing.

    All those options present, however, present opportunity and risk - which to some extent go hand-in-hand. With proper networking, education, and hands-on involvement, you'll be equipped to make your own decisions. You're on BP which is the best place to start and has a wealth of helpful info and participants.

    Regarding @Scott Trench's great post that was referenced, "Where Should You Invest the Cash For Your Next Down Payment?", I would not encourage the use of the stock market if you're plan is to use those funds for RE. Index funds are great for long-term investors, potentially terrible for those with a short time-horizon. You will not lose money in index funds - unless you sell your shares when the market is down. When will it go down? Up? Who knows! That's the premise that underlies indexing. Over time, the stock market will provide healthy returns, but it comes with lots of volatility (ups-and-downs). Indexing is great if your committed to the stock market or are OK deferring your RE plans, if the market drops.

    RE can beat the stock market because the RE investor can put in the time and effort to influence the investment outcome - which can't be done in the stock market.

    [email protected]
    2Reply
  • Don Aleshire
    Chicago, IL · Member since 2017 · 44 posts · 16 votes
    9y

    Great point @Bernard Reisz ; the short term volatility of the stock market makes option 3 in the article a bit much for me to handle. 

    1Reply
  • Charles Kennedy
    Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
    9y

    I agree with @Steve C., no need to pay down this mortgage quickly if its fixed at 4%. One of the guests on a podcast said that his goal was to have $2MM in DEBT We are in such a low interest rate environment, where money is cheap. I'd bet by the time you pay that loan off you will not be able to get a loan at 4% anymore.

    If you are a prudent investor you should be able to earn more than 4% elsewhere (SP traditionally has returned 6%, and is the most passive investment you can make) and as RE investors we certainly seek returns in excess of this, so don't worry about paying down that mortgage so quickly. If you took that extra money you were paying down your mortgage with and invested it elsewhere, you should (hypothetically) be increasing your net worth much quicker.

    In regards to general savings, I have roughly 2/3 in the market and 1/3 in a savings account earning 1.3%. I don't like the savings account, but I keep money there to capitalize on opportunities should we experience a market downturn. I feel that the little interest I'm making now, will be mitigated when the cycle ends.

    1Reply
  • Bill HamptonBusiness Member
    Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 979 votes
    9y

    @Michael Lee Gundersen, welcome to the BP family. Good luck and let me know if I can be of assistance.

    404-482-3170
    Hampton Tax and Financial Services LLC4.7106 Reviews
    WebsiteView Page
    1Reply
  • Ashton Cleveland
    Rental Property Investor · Bend, OR · Member since 2016 · 27 posts · 26 votes
    9y

    I'd say it all depends on your timeline and personal risk/reward ratio. For me personally, I'm almost two years out from purchasing my first duplex and would rather invest savings in a low cost S&P 500 ETF than lose to inflation in a traditional savings account. With that said, I will move capital to a more liquid savings account as my deal frequency increases and I am more able to take advantage of market opportunities.

    0Reply
  • Diogo Marques
    Financial Advisor · Cascais, Lisboa · Member since 2015 · 199 posts · 83 votes
    9y
    1/get rid of all non productive comsuption habits 2/pay your house 3/have a % of your reserves in an index in the stock market. It will always trump any pseudo financial advisor out there. It is also liquid so you can always get your cash back. 4/REstate: either do it yourselves or invest with a syndicator 5/have cash "float" money always around. Like "pops" Buffett says so you never have to depend on "kindness" of strangers
    0Reply
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