Real estate investing isn’t something that’s reserved for the wealthy. With just a small down payment, anyone can dip their toes into the water and enjoy the benefits of owning income-producing property.

Determining the Size of Your Down Payment

Before you develop a savings plan, you need to be aware of how much you’ll need to set aside in order to make a reasonably sufficient down payment.

“If you don’t plan to live in your investment, you will typically need around 15 to 20 percent down payment for a single-family home,” according to Holly Johnson of LendingTree. “To qualify for the lower 15 percent down payment, you usually need a credit score of 720 or higher. For a multifamily unit you don’t plan to live in, you will likely need to put down 25 percent of the purchase price.”

The rules may be slightly different for a rental property that you live in. You can often expect to pay 5 to 10 percent less for duplexes or multifamily properties. And if you’re willing to go with an FHA loan, you might be able to go as low as 3.5 percent.

Regardless of what the lender requires, you’d be smart to put down at least 20 percent, which will allow you to avoid paying private mortgage insurance (PMI). Typically, PMI will cost you 1 percent of the total loan amount per year. This means you can expect to pay an additional $167 per month on a $200,000 loan.

How to Save a Down Payment

With 20 percent down as your goal, here are some practical ways you can save up enough money to buy a real estate investment property.

1. Create a Budget

The first step toward saving money is to create a budget. With a budget, you’re pre-determining what you will and will not spend money on and defining how much. By setting spending perimeters and tracking where your money’s going, you’ll be better able to save more and stay on track.

2. Slash Expenses

The first time you build out a budget, you may be shocked by how much money you’ve been bleeding on unnecessary expenses. With this wakeup call in mind, start to prioritize your money.

“I think people need to get laser focused and remember their value system with every purchase,” financial counselor Lauren Greutman told Brandon Turner in an interview for Forbes. “Every time they make a purchase (at Target), they need to realize that the foolish purchase is making their goals get pushed further and further away. They need to make their spending a reflection of their value system and put that down payment at the very top of their value list.”

3. Sell Items

Depending on your income and fixed expenses, there’s a cap on how much money you can feasibly save over a period of time. But there are other ways you can kick your savings into high gear. For example, you could sell items that you no longer need or want.

Watches and jewelry can be particularly valuable. Unsure of how much your watch is worth? Take it to a local jewelry buyer, and get an estimate. You won’t know until you ask!

Tech gadgets like laptops, tablets, and smartphones can also provide a nice sum of cash to put toward your down payment goals. Be willing to get creative!

4. Set Aside Unexpected Money

Anytime you receive money unexpectedly, put it into your down payment savings account. Unexpected money might include things like tax refunds, work bonuses, stock dividends, gifted money from family or friends, or lottery winnings.

5. Take on Extra Work

Do you have the ability to take on a part-time job or side hustle to bring in some extra money? Even a small amount—like $100 per week—can really make a dent in your savings goal over the course of a year.

Patience is Your Friend

Avoid trying to rush into a real estate investment prematurely. If you don’t have enough cash on hand to make a 20 percent down payment, it’s probably an indicator that you aren’t financially prepared to make an investment of this magnitude.

Take your time, diligently work toward your savings goal, and begin investing when the time is right.

Article Source: https://www.biggerpockets.com/