What is a good amount to save to prepare for first Real Estate Investment?

Question

Hello,I'm in the early stages of learning the basics of REI. However, I want to start the process of saving for it now. I'm considering buying and holding, flipping or BRRRR as options. I haven't yet decided which strategy is best for me, but don't want to wait to start saving. What do you think would be a good ballpark figure to save for a first time real estate investment in the greater San Diego area?Thank you!Tahirih

Carlos Valencia · Answer

Hello Tahirih, Do you plan on purchasing as an investment or open to the possibility of house hacking where you live in one unit and lease out the rest? Owner occupied usually needs at least 3.5% down if using FHA or 3-5% for conventional. As for Investment properties you will need 20-25% down payment. Just look at the area of where you plan on investing to see how much you will need to save. Hope this helps. @Albert Bui @Matthew Kwan

Nathan Harden · Answer

Carlos is spot on. It really depends the route that you are wanting to take. Going FHA with 3.5% down is a great option for a lot of first time investors because it gets them into the game with minimal out of pocket and a rental to add to their portfolio.

Ben Einspahr · Answer

@Tahirih Moffett. Good rule of thumb. 6 months in savings for you personal expenses and 6 months PITI for each rental property. Have I gone below this threshold? Yes. All depends on your risk tolerance.

Zarrin M. · Answer

Hi Carlos, Thank you so much for your response. I wasn’t considering house hacking but it appears that the differences in down payment are substantial when it comes to seeking a bank loan for investment vs house hacking. Is a 20% down payment pretty standard when it comes to getting a bank loan for an investment property or are there exceptions where a lower down payment is offered?

Bryan Morell · Answer

I was able to utilize the FHA loan strategy myself for my first investment property and I would highly recommend, if possible. It is a great way to get into REI with low money down while gaining hands on experience to learn the ins and outs. Thank you!Bryan

Zarrin M. · Answer

Eliott, thank you for your message!

Steve Meyers · Answer

@Tahirih Moffett San Diego is a tough market in general to cash flow in for an investment property, it's definitely still possible just harder to find those gems. I wouldn't waste the time trying to save up 20% down for an investment that will take forever for most people and the market can change a lot by the time you're ready.. With FHA the property needs to pass a self sufficiency test which basically means that 75% of the rents must cover the mortgage amount, which I have yet to find here in San Diego because a lot of the time these mutli units have tenants in them that have been paying well under market rents. The lenders won't use short term rental income either so it will need to go off the current rents or if vacant the current market rents which typically still don't cover the 75% of the mortage I've found especially now with higher interest rates.My recommendation would be to find a single family house to house hack with and rent out some of the rooms or you can get a duplex and rent out the other side doing STR or MTR (short term rentals or mid term rentals). There is also Padsplit which is a newer site that is similar to air bnb and let's you rent out by room rather than an entire house and is cheaper than air bnb I'm told. Hope that helps, feel free to message me if you want to chat about more creative options.

Carlos Valencia · Answer

Yes any investment property thats the standard 20-25%. Second homes range from 10-15 % down. Its definitely best strategy to buy as primary with FHA 3.5 % down. Then move out after 12 months rinse and repeat.

Nathan Gesner · Answer

"How long should a man's legs be? Long enough to reach the ground."How much you need to save depends on far too many variables. I recommend you educate yourself on the different ways to invest in real estate, pick one, and then save up accordingly.

Nicholas L. · Answer

@Tahirih Moffettboth BRRRR and flip involve lots of costs that aren't highlighted as much on BP - it's not just "purchase + rehab." if you haven't seen them, check out Tarl Yarber's videos on YouTube. he does deep dives into ALL of the costs of his BRRRRs and flips. they involve tens of thousands of dollars of additional costs on both the purchase AND the sale (for a flip) or the refi (for a BRRRR.)if you can do a live-in flip or a house hack or something similar you can put less down. a straight-up investment property without something creative is going to require 20-25% down + closing costs.hope this helps