Saving money on your next downpayment for a rental property!

As many of you have read/ seen by now, house hacking is an excellent way to get started in real estate. Since you will be living in the property, you are open to more financing opportunities with low down payments and you can have a great hands-on experience to get you started. I, like many others, started this way and learned a big tip that I would like to share to help others save on the downpayment! This can be applied to any loan and not just for house hackers/ FHA loans.

An FHA loan is for owner occupants only, but is very easy to be approved for and only requires a 3.5% downpayment. So for those reasons it is a very popular choice for beginners. For some that are young in their investment journey, that 3.5% could still be a large chunk of their savings and still be a little tough to pull off. Here is a huge tip I found when closing on my first property that saved me $6000 at closing, resulting in an $8200 downpayment on a $375,000 triplex.

If you have tenants in the property already prior to closing, schedule your closing date as close to the beginning of a month as possible. This will allow you to 1) receive a credit for the entire rest of the month at closing, and 2) also allow you to collect rents for the following month prior to your first mortgage payment. In short, you can receive two full months of rent prior to your first mortgage payment! If you use the full 6% seller assist at closing, the seller will cover the pre-paid interest which is the only downside to closing at the beginning of the month. Below is my example:

I bought a triplex for $375,000 with an FHA loan, requiring a downpayment of $13,125 (3.5%). I negotiated full seller assist (up to 6% of closing costs), which covered all of my closing costs. The property was currently producing $3200 a month from all three units. Since I moved in to one of the units the second month, the monthly income for the second month was $2800. I closed on the property on July 1st, which meant two things: 1) I received the full credit for July rents at closing ($3200), and 2) my first mortgage payment was not due until September 1st so I received the full income for the month of August as well ($2800). So by closing on the first of the month, I received $6000 cash in the first two months of ownership, bringing my initial investment down to $7,125. Factoring in due diligence costs, I ended up only spending $8200 for this triplex.

Had I closed on June 28th, here is what my numbers would have looked like: At closing I would have only received $213 credit for June rents ($3200/ 30 days, times 2 days for June 29/ 30) and my first mortgage would have been due on August 1st. I still would have received $2800 in rents for July, but that would result in savings of only $3000 at closing. So those three days allowed me to double my rental income the first two months of ownership, which was a huge help for me starting out.

For some properties, it wont make a big difference either way. If a property is vacant prior to purchase, it won't make a difference at all. But if it is occupied and you can push closing to the beginning of a month, it can be an easy way to earn some additional income upfront! This shouldn't be a deal breaker for you, and I definitely do not recommend buying the property if this is the only way to afford the down payment, but it can hopefully help you earn some extra cash after you close on the property.