If you have been in the Baltimore County rental property business for a while now, surely you have benefited from reading our money saving tips when it comes to being a landlord. After all, regulating investment property expenses is essential to maintaining a positive cash flow and ensures your rental property costs do not break the bank.
In addition, for those who were interested in how to finance their White Marsh or Essex rental properties, here at Bay Management Group we offered up 7 creative ways to do just that.
But what about those who are just starting out? Those who have yet to save enough money for a down payment, no clue which Baltimore County city they want to invest in, and no idea where or how to even begin?
One of the biggest roadblocks to realizing the rental property dream is getting that first property bought and leased. Though purchasing rental properties is one of the best ways to increase your wealth and create a passive income, saving for that down payment can be difficult.
Whether you are opting for a Federal Housing Administration mortgage loan that requires 3.5% down, or are aiming for a conventional loan that requires 20% down, the following money saving tips can help you realize your goals sooner than you think and get you on your way to becoming the best landlord Pikeseville has ever seen.
Typical Purchasing Costs
Before we get into how you can save money for a down payment on an investment property, we will take a glance at the typical costs you can expect to see during the purchasing process.
Yes, each property purchased will come with its own unique purchase price, but for example’s sake we will look at how much the average 3.5% and 20% down payment might be on an Baltimore County property purchase. With the average home price hovering around $220,000, it is safe to say that most surrounding areas, such as Owings Mills will be similar.
3.5% down on a $220,000 property = $7,700
20% down on a $220,000 property = $44,000
Either way that’s a lot of money.
There is no way to avoid the closing costs when it comes to making a property purchase.
You might be able to convince the seller to cover some of the closing costs, but typically, you are responsible for a sizeable amount.
Closing costs include:
- Recording fees
- Origination fees
- Tax certificates
- And more
You can expect closing costs to be about 3% of your purchase price.
3% closing costs on a $220,000 property = $6,600
Again, this is a lot of money most people do not have easy access to.
So, if we take a look at our running example, to purchase an investment property in the Baltimore County area, whether in Catonsville or Parkville, you can expect to need between $14,300 and $50,600 as a total down payment on your rental property.
Now, let’s take a look at how you can start saving for that amount starting today.
Saving for a Rental Property Down Payment
Create a Budget
In order to save a large amount of money, you must have a plan.
Start by creating a budget and keeping tabs on every penny that you spend. Determine what must be paid for each month (i.e. living expenses) and dedicate yourself to setting aside a specific and affordable amount of money each month to be used strictly on your down payment.
Get a Separate Savings Account
Experts have long advised that in order to have success in sticking to a budget, the way to do it is to have a separate savings account.
The money you decide to set aside each month for your Dundalk property down payment should not be in your regular checking account where it can be easily spent without you even realizing it. Keeping this money separate protects it from being spent and gives you a visual on your progress.
Live Like a College Student
Cut out the excess and start living more like Towson students to save faster than ever. You do not need a $5 latte from Starbucks every morning. Maybe that gym membership you never use can be cancelled. That expensive cable bill you pay each month? Consider getting rid of it.
Plus, any extra income you come across such as a bonus from your boss, a tax refund, or the money you get from doing some side work for your friends and family can help build your down payment quickly by putting it into your savings account straight away.
Borrow From Yourself
Sometimes using your retirement savings to fund your down payment is an option worth considering.
Certain retirement plans will allow you to withdraw money that you have saved and use it on a large purchase such as a home. For instance first time homebuyers can often cash out up to $10,000 from their IRA without being subject to the 10% early withdrawal penalty.
Before you do this, however, consult with your tax attorney or accountant to make sure that you are making a good decision.
Get Out of Debt First
Before you even start to save up for your first property’s down payment, it is a good idea to clear away as much debt that is in your name as possible.
Do you have a lot of credit card debt, an outstanding car loan, or even student loans? Check out this debt calculator to see how much you would need to pay each month to become debt free. Not only will this help with your mortgage approval, but it will free up lots of extra cash each month that can be used towards saving up for your down payment.
Reduce Other Expenses
Another option for freeing up extra money each month is to reduce other expenses that may come in at lower rates elsewhere. Things such as your car insurance, renters insurance, health insurance, and those pesky internet/cable/phone bills. Sometimes making adjustments in service plans or calling around can secure you a better deal saving your hundreds or even thousands of dollars each year.
The truth is, saving any amount of money can sometimes be difficult. Life expenses, emergency situations, and the fact that everyone wants a vacation every now and again, can make it feel as though saving enough money for a down payment on a rental property is out of reach.
However, by implementing some of the above-mentioned money saving tips, you easily see that a lot of your money can be directed towards saving for a down payment, without having too drastic of an effect on your daily life.
Just remember, after you save for that down payment and purchase the perfect Baltimore County rental property, you are probably going to need a quality property management company to help you manage this new endeavor you have taken on.
Managing your own rental property is no easy feat. Yet, the property managers at Bay Management Group are experts at keeping costs low, handling all of your property’s needs, and giving you the peace of mind that your investment was a wise choice.