How much savings you should have when you purchase your first property?

Question

Hey guys just wanting some insight or advice on how much savings one should have before a purchase, I know people on here talk about no money down for buying but when the mortgage comes what's your safety net or savings amount you like to have to pay for say a few months rent or worst case scenario ... Thanks!

Tony

Account Closed · Answer

I'm a pretty conservative guy, so when I was budgeting for my properties I wanted to make sure that even when (not if) I got financially caught off guard, I wouldn't have to worry too much.

I made sure that I always had enough cash set aside to cover my family's current monthly living expenses plus the rentals carrying costs for six months.

Tony Dragoo · Answer

Thanks for the responses guys that helps out a lot! I'm going FHA and buying a duplex in the 125k range and I'm gonna try to have it rented out in about 3-6 months, but my goal is to have 3 duplexes in 5 years, my apt I'm in now is a lot more expensive than my mortgage for a 125k home would be so I'm trying to play it as safe as possible for this first purchase. Thanks!

Shanequa J. · Answer

I had 12k with my first property.

Sean Ploskina · Answer

It will come down to how you finance the property and you personnel risk tolerance.

If you are buying it as a investment property from the bank they may require up to six months in mortgage payments in reserves.  So 300/mo X 6 months= 1800 dollars on top of everything else.

At a minimum I would have 5000 for your first property if it is 1 or 2 units.  This will cover unexpected expenses that you haven't accounted for with your first property.  I speak from experience on that one.  I bought a fourplex with everything I had and two of the four promptly stopped paying the day I closed.

Verna M. · Answer

I think it's really how much risk you are willing to take and your personal life situation.  What is ok for someone who's 25, living in an apartment with a roommate is a lot different from someone with a personal mortgage and two kids. also,  what are your goals?

I find I am willing to take on more investment risk if I have years worth of cash on hand at all times.   And I mean cash, sitting in a money market account.   This does two things, first it allows me to ride out the ups and downs of the market without losing sleep.

And second it allows me to  work part time freelance. Not worrying about paying my bills on the short term affords me the ability to pick and choose when I want to work, instead of having to constantly find work.  The ability of saying "no" to employers makes your value go up in their eyes as well.  I work in a unique industry where freelance is the norm.

Of course, your situation might be different. I am currently over invested in the stock market and looking to diversify with some property and am considering the same thoughts myself.

Scott Trench · Answer

@Tony Dragoo

Thanks for this great topic!

The question of how much money you'll need for your first purchase can be followed up with two obvious questions:

1) How much do the properties you are interested in cost?

2) How much of Other People's Money can you use to finance the deal?

I'll actually start by solving question number two here first, and working backwards from there - as a first time purchaser you are in the enviable position of being able to use FHA financing (most likely) - so long as you occupy one part of the property initially.  This means that you can put as little as 3.5% down on your purchase.  If you do NOT want to live in this property, and it is a pure investment, you will in most cases need to put down 20%.  While it's possible to get "creative" and find ways to put down less, the path of least resistance will likely be one of these two routes for your first property.

Now, I don't know your market very well, but if the types of properties you are interested in purchasing are in the ballpark of $100,000 apiece, you will either need $3,500 OR $20,000, depending on how you purchase it.  A vast difference in personal capital that can exponentially speed up or slow down your entry into real estate investing.

I personally went with the FHA financing route and was able to buy a $240,000 duplex with just $12,500 cash.  I now live in part and rent out the other, enabling the other side to cover my mortgage.  This enables me to accumulate capital for my next purchase at a more rapid rate - a purchase that I intend to acquire with the traditional 20% down.

It's remarkable how much easier it is to purchase a first property than people think - or its remarkable how much money others will loan you with decent credit history, etc.  That said, no matter what you do, how much you put down, or how you finance the property, make sure that you put in the time to get a great deal.