Some of the perks of investing in real estate are capital preservation, cash flow, property appreciation, tax benefits—all words that are music to an investor’s ears. But how much money to start investing is actually needed to make a minimum investment?

Unfortunately, no one will (or can) give a definitive answer. Usually, experts and investors will say is that it depends. So how can a person build their portfolio? Where do they even start? Well, it depends.

The first question a newbie should ask

Ask yourself this: “Do I want to create some passive income, or do I want to become a full-time investor?” It is important to learn as much as possible about real estate to figure out which purchases to prepare for and what is a realistic minimum investment. Keep in mind that a substantial amount of time is needed for investors to learn the ropes.

Oftentimes, it’s recommended to hire a coach knowledgeable in real estate or to find a mentor. This way, these experts can guide newbies through the process, including building a portfolio, limiting risk tolerance, putting together an emergency fund, and most importantly, figuring out how much money is needed for real estate investing.

Another recommendation from experts is for beginners to dedicate at least an hour to learn the business. They should wake up 30 minutes early, spend half of their lunch hour consuming content, and read a book before they hit the sack. Everyone has at least one hour per day to dedicate toward their future. It does not matter what type of content it is, as long as it imparts real estate knowledge.

There are many to choose from, such as books, podcasts, audiobooks, or even YouTube videos for visual learners. The key is to continuously access information about real estate to keep motivated and engaged.

Why padding your savings is critical

While it’s true that people can get started in real estate for no money down, one of the best recommendations is to have at least $50,000 saved up. Not that $50,000 is needed to buy that first property (it may be far less), but more importantly, it provides a shored-up financial foundation and starts from a position of strength.

Think of this as having a financial moat. This financial moat generally consists of saving up a minimum of three months of personal expenses (having six to 12 months of expenses is better) and any deductibles in cash. This emergency fund can help navigate a job interruption, broken-down car, health crisis, or help buy time to figure out the next steps financially when life throws a curveball (like a pandemic!).

Preparing financially to buy an investment property

Now that there is a financial moat in place, it is time to figure out how much money is needed for a minimum investment. In most cases, to buy a property, these are the bare minimums to consider:

Lending expenses

• Down payment: This can vary widely depending on the investment strategy, market, and lending strategy. If the investor is using an FHA loan for a house hack, this may be 3%–5% of the purchase price. If they use conventional or commercial financing, this may be 20%–25% or more of the purchase price.
• Closing costs: This too can vary widely depending on the investment and lending strategy.
• Reserves: This can vary from lender to lender, with most lenders post-COVID-19 wanting to see six to 12 months of expenses in cash or escrow. Some lenders request the insurance deductible be set aside as well.

Property expenses

• Rehab vs. rent-ready: The make-ready expenses on a property can vary widely, from simply changing the locks to a full gut rehab. In either case, make sure to have the full rehab/rent-ready scope estimate locked in prior to closing on a deal, and add a contingency to this budget to account for surprises.
• Lease-up expenses: Unless the property is turnkey with a tenant already in place, investors should be ready to add in lease-up costs anywhere from 25%–100% of the first month’s rent.
• Vacancy expenses: Be certain to factor in, at a minimum, one month of vacancy costs in underwriting—if not more—for the next year or two. (Average vacancy rate is around 8%, but be sure to calculate the vacancy rate for your area, too.) The property will be vacant at some point—it’s just a matter of when.
• CapEx/maintenance reserves: It’s not uncommon for a new investor to “fudge the numbers” on their first property and not set aside adequate CapEx (capital expenditures) and maintenance reserves initially. Many stories go like this: An investor closes on a property, and the water heater that’s supposed to have five years of life breaks down suddenly. As the new owner, they will have to replace and repair items. A water heater costs the same whether it’s a $60,000 home or a $200,000 home.

These seemingly small amounts of money needed to close a property and get it to profitability can add up quickly.

How to get started investing in real estate

So, how can you start navigating this process, figure out how much money to start investing is needed, build your “financial moat,” and build capital for your first investment? Here are a few steps to take:

1. Pay down any consumer debt that will negatively impact your debt-to-income ratio (DTI) and prevent you from getting decent lending. Look to reduce these payments first:
   • Credit cards
   • Personal loans
   • Car loans
2. Set aside an emergency fund of at least three months of personal expenses plus any deductibles for health, car, a retirement plan or individual retirement account (IRA), and home insurance. Bonus points if there is wriggle room for six to 12 months. If some of the debt is paid down, you can now snowball your previous payments to build personal reserves.
   • Investors should consider their Roth account as a double-duty IRA since they can liquidate it penalty-free for most emergency needs. Moreover, they can leverage their employer payroll deductions and potential match to build this IRA quickly.
3. Have a minimum of three months of reserves set aside and begin to determine your investment goals, investment strategy, and market. This will help inform what you will need for other expenses.
4. Talk to various lenders for a recommendation to determine lending needs for minimums, purchases, down payment, and reserves.
5. Talk to local property management to lessen risk management and understand what fees to expect for your property expenses.

CTTO Article Source: www.biggerpockets.com