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Updated almost 9 years ago on . Most recent reply

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Kurt Kline
  • Irvine, CA
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Best Route to Save Money for First Deal

Kurt Kline
  • Irvine, CA
Posted

Hello,

I started researching real estate a few months ago. I have read a few books, listened to the BiggerPockets Podcast, and attended a local real estate meetup. I am 23, and I just started working at a tech firm about a 1.5 years ago. Currently, I have about 27k in my savings account, and some change in my Roth 401k. 

My question is: What is the best way to save up money for my first deal? FYI I am hoping to score either a 3 or 4 unit multi-family home that I can live in and hopefully live rent free. I just read Investing in Duplexes, Triplexes, and Quads by Larry Loftis and I believe he proposes an excellent strategy. 

I know that I can save capital by just piling it up in my personal savings account, but my gut tells me that that idea isn't very smart since my money isn't growing at all. I would like to invest more into my personal 401k and create an IRA, but I also don't want to limit my chances to invest in real estate if those types of accounts create complications.

I am hoping to acquire my first property within the next 2 years. I read a few posts regarding a Self Directed IRA/401k, but it seems that maybe that is a better strategy if I already have more money in my IRA/401k? Or maybe there are options I am not even considering.

Please let me know your thoughts, BiggerPockets community! 

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Scott Trench
  • President of BiggerPockets
  • Denver, CO
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Scott Trench
  • President of BiggerPockets
  • Denver, CO
Replied

Saving up for your first property is a choice. While there are many games you can play, including borrowing against a 401(k), partnering with someone with cash, working with seller financing, and using equity from your personal residence, the harsh reality is this:

If you can't aggressively accumulate money every month, you probably won't succeed in real estate.

If you want to buy real estate out in Cali, Bro, you are probably going to need to be WAY more aggressive than the rest. I'm talking $5,000+ per month if you can, and that will probably get you into a respectable duplex, triplex or quad in a year or two in a good part of town.

Now, it sounds like you understand that and the question you pose is how to invest that money in the short-term.

I believe that there are two philosophies - one is to keep the cash liquid. In that case, you can keep it in a savings account, or in a money market account. Either way, you lose to inflation.

With the significant sums of money that you are going to need to save, and the significant (1-2 year) timeline that you've got going, I'd be putting my money (and I am) into index funds. Yes, I lost 10% over the last year or so like everyone else, but I'm fine with that, because I believe that over a lifetime, my strategy is likely to produce that 10-12% annualized (nominal) real return that index funds have historically provided.

This won't work for everyone, but if you can accept that you are doing the statistically right thing with your money, you can swallow that 10% loss, knowing that in the long-run, it will probably be the correct place to park your money.

My strategy is simple. I have ~$7K for personal expenses and about $15K in a cash reserve to be used exclusively for real estate business related work/repairs, etc.

Everything over that goes into index funds. VTI, VOO, etc. I liquidate when I buy. Sometimes I'll lose, sometimes I'll win. If history continues to be a good barometer, my savings will earn ~11%.

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