Newbie - How should I save to fund my first investment?

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I'm new to real estate too, but not to investing and personal finance. Velocity of growing a property portfolio will depend on "core" financing strategy, including equity management, mortgage products and financing resources, but a wholistic approach beyond standard banking will: - speed things up - open new options - mitigate risk To obtain money for real estate, you can: 1. Borrow 2. Save 3. Earn I recommend using a combination of all three methods. In addition to [growing portfolio faster], using 'save' and 'earn' methods alongside 'borrowing' will [keep your pipeline full] down the road, give you [buffer to prevent setbacks] and [durability to last through any downturns]. It will make lenders want to give you loans and alleviate temptation to take on excessive loans too fast. Below are some ideas. 1. Borrow Refinance: you may be able to pull out max of 90% equity from a local bank. Build relationships through networking and ask a good mortgage broker. This strategy introduces some risk because you may be less durable in the event of a recession. Carefully review loan rate terms and calculate "worst case" numbers should treasury interest rates rapidly increase and home value drop 20-50%. Could you still afford payments and avoid selling low? Even with surprise vacancy? Is interest rate capped? Adjustable? Length of term? Balloon risk? All need consideration. 1031 exchange: you can sell your current place and move proceeds to escrow for 1031 exchange to buy a different property of equal or greater value. Officially, you need to make next purchase within 45 days. Advantage is proceeds from house sale are "tax deferred" so you can indefinitely delay paying capital gains tax on appreciation you gained in the old house. This means you get to reinvest that money and get appreciation and CashFlow on those dollars. Consult a qualified pro for help. Seller finance: work out a deal directly with the seller of a future property. This can let you buy a new place in a situation when bank might not lend it to you. Private investors: practice running numbers on cash flowing deals. Network to find established real estate investor and ask them to review your deal to critic. Once refined, ask that person or another if they'd like to front money for large percent of gains. Bigger pockets community can recommend fair terms. For profit share on top of principal, I like 35% me, 65% for investor. Always take good care of your investors. They make the deal possible and have most skin in deal. In this case, I've heard people putting loan in their name when investor puts way more cash. Transfers risk off investor and puts on borrower. Build credit: Strategically build credit to get future loans 2. Save Analyze current expenses: - create spreadsheet of ALL expenditures over last three months - find and reduce or eliminate any expenses you don't need or love - target 15% monthly reduction. For 3k monthly budget, that's $450/month or $5,400/yr. - areas include eating out, entertainment subscriptions, convenient purchases, expensive dates or drinks, consumer goods, fancy brand items, rent or mortgage at or over 30% pay, etc. - don't give up everything you enjoy, just be aware that small choices add up. Avoid unnecessary ones. - send extra money to separate savings or investing account on same day each month Invest in other asset classes: - you might seek a talented mentor in stock investing and ask for help building a portfolio targeting 15% annual returns. There's risk, but it's definitely possible, even these days. Review capital gains taxes before. - get a compounding interest calculator. I use "compound me" app for IPhone. $450/month for 3 years at 15% average annual compounded appreciation should yield $20k+ after taxes. That's a 20% down payment on a 100K property, a new roof for an existing rental property, or 12 months cash reserves at 1500+/month. Certain loans may require 6 month's cash reserves, so that may cover two loans, qualifying you for money you couldn't otherwise borrow for new CashFlow. Pretty awesome, and this new strategy can cook on the back burner so it's ready when you need it. 3 yrs is doable! 3. Earn New income: - add new sources of part time income to accelerate savings and get funds sooner. - goal to earn extra $500/month - combined with $450/month savings = $5700 after 6months, or 3.5% down on a 165k property residential property with an FHA loan. I think you can get 4 of those type loans before entering higher lending requirements? -After 2 years it's nearly 25k. - After 3 years invested for 20%annual compounded interest - nearly 50k! That's close to a turnkey single family in some regions. Certainly would buy another flip or pay for good reno projects on two properties to force appreciation on each. Worth looking in to. Ideas include: - drive uber - Tutor school kids - babysit - cut grass - handwrite invitations - sharpen cutlery - make YouTube channel for product reviews - write a book - teach guitar lessons - run a summer camp - sell things on eBay - organize parties for people - part time customer service emails for company - write resumes for employees - property manage - start Etsy store - air BnB a room in your house - buy clothes in thrift store and sell online - host BBQ dinner and sell tickets for food and beer Get a raise: - you can also ask boss for a 5% raise. If you and husband do so successfully, that's 10% more right there, or another 10k/yr pretax for 100k income household. Added that to $5700 gained from six months of saving + extra earning and you've achieved over 20k new money by this time next year. Good luck, and I hope this helps spark ideas! Anyone have comments on this? Best, Michael

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@Michael Kelly thanks so much for providing such detailed feedback! Your post was really helpful! :)

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Michael Kelly that’s a good illustration of the many ways to fund your first flip.

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Flipping in a tight market, where there is so much competition for value adds, is not easy. It is not easy to find a value add that can be purchased for a decent price. Use of HML will significantly increase your holding costs. If you are not an RE agent, the cost to sell is not cheap.I question how many recent first time flippers in So Cal turned a profit on their first attempt. I suspect that a large percentage performed the flip for the learning experience but not by plan; they expected a profit that was not achieved.It would be safest if you realize your first flip could lose money and, if it makes money, the financial compensation likely would not justify the effort and risk.Ideally you would have gain some key knowledge and maybe some skills that could be leveraged on your next flip. This increased knowledge hopefully leads to more profit on subsequent flips.As Thomas stated, RE investing has risk. I think this risk is highest for those with minimal experience and finances. You should think of it like a competition. Those with experience and deep pockets are better equipped to succeed in RE. They have networks and often teams to help them find the best projects. They will find many of the projects that work. They have trusted contractors to perform any task. They have vendors that may provide them a discount. You need to find either what they missed or what they chose not to pursue because the profit did not warrant the effort/risk. You then need to get the flip work done and flip the property for a profit. It will not be easy and it will require work.Good luck

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Flipping houses is ultra competitive. I'd keep saving until you have enough money to do the deal in cash. Flipping got really popular a few years ago because we had a historic crash. Those days are over. So that leaves you with slim inventory and many people fighting for it. You need competitive advantages to edge out the competition. You'll be going up against folks who can outbid you because they don't have to pay for the money, they probably have in house realtor & construction services as well. Going against all that is a recipe for disaster.

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Save money from day jobs. Buy rentals. Repeat 20 times. Pay down debt with extra cash flow, get some if not most of all of properties paid off. Do this for 10-20 years. Retire rich.

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Flipping is very high risk, all real estate investing is high risk, if you are not prepared to accept that you can lose all your investment you should reconsider investing. It is part of the game. You need to get comfortable with leverage.High risk, high reward.

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@Aaron Klatt and @Ryan Luby thanks so much for the feedback!@Ryan Luby thanks for the alternative backup strategy suggestion! I will definitely keep that in mind when looking at properties. I hadn't thought of converting from a flip to a rental if the flip struggles to sell. It's a really great idea!

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Welcome Sunshine,You have to do what makes you comfortable and save as much as you can always. Find a lender and in my opinion try to put as little down as possible so you can keep cash for emergencies. Everything is risky. To me tying up cash in a deal is more risky than leverage but thats for another day. My best advice is for you to start evaluating single family rental properties constantly. Hear me out. The best way to offset risk especially starting out is to give yourself multiple exits even if things go wrong. The best way to do this is ensure you buy a single family property that will be an excellent rental (after repairs of course) if things go south and it doesn't sell. Search for properties that need work, but evaluate them and look for the ones that would be great single family rentals. When you find those, in good enough rental markets then evaluate the property as a flip and see if the numbers make sense.I wouldn't necessarily say this is the greatest strategy to get the highest profit on a flip, but it is in my opinion as close as you can get to a truly hedged investment in real estate.Other than that, seek out a partner or a very experienced GC who has done flips so you can pay him to basically walk you through the project. Just be careful, vet everyone you will work with, don't give out money before work is done, and do your best to keep multiple exit strategies open.If Richard Branson was able to negotiate to give back all planes to Boeing if his airline didn't work out, I'm confident you will find a creative way to limit your downside on your first flip.Hope this helps, best of luck!Be sure to post your success story when you complete your first flip

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If you don't know what you're doing and don't have reserves hard money can be risky, it will all depend on the purchase price of the home you are looking to flip and how much work it needs. If you look in the inland empire things are much cheaper but do not sell for as much when rehabbed either. Evaluate several properties on your own and see what the profit would be for each, even ask the forum for help if necessary. Then when you see the profit numbers you can properly evaluate if borrowing from a HML is worth the risk.