If You Are Stuck In The "Saving and Waiting" Phase Then You Need This
Most beginner real estate investors say "I am just saving and waiting right now" which for some of you is totally ok, but most beginners don't even know what they are saving until! They don't have an actual target to save till to buy an investment property in there area!
How do I know this is true? Because I literally did this for 4 years... telling myself that I did not have enough to invest, so I just went back into reading the books, listening to the podcasts and watching the YouTube videos.
It's totally ok to not have enough money to buy your first investment property, but what you need is to be able to have a specific target that you are working towards that will allow you to buy a home in the area you are planning to invest, using the financing method you were planning on using!
What Numbers You Need:
Before I tell you how I am going to tell you what you need, then give you exact step by step directions on how to get it.
So, there are 4 parts:
1. The Price of the Homes in the area. The goal here is that you need to know where you are planning on investing first. Once you know where you are planning on investing you need to get the average or median home values in the area that you are planning on buying in this way you know how much you can put down.
2. The Percentage of the Downpayment. Once you know the home value, you need to know what you are planning on using for financing. Are you planning on using an FHA loan and putting 3.5% that is a very different savings number compared to putting 25% down or putting 100% down. You need to know what your downpayment percentage number is in order to budget the money you need for this.
3. The Closing Costs in Your Area. On average from what I have read and seen its about 2-5% of the home price based on your location. I like to budget 5% to be sure! The higher the closing costs the more you will need to save obviously!
4. The rehab needed for a house. This now is a little more dependent on the property, but if you are planning on doing some minor renovations, you will likely need 5K saved, if you are looking for some more you might need more.
5. Carrying Costs of Owning the Home Vacant for a Few Months. This is only needed if you are having a house that is vacant for a few months. If you the home is not vacant and already rented - this is not a problem you need to worry about. If it is vacant, you can budget 1-3 months of the costs of the property.
How to Calculate How Much You Really Need to Invest:
So, the formula is:
How much you need to invest = Down Payment + Closing Costs + Estimated Rehab Costs + Carrying Costs
Down Payment = (Median/Average Home Value) * (Percentage You are putting down)
Closing Costs = (Median/Average Home Value) * (Closing Costs in Your Area)
Estimated Rehab Costs = 5K for minor repairs, 10K for major cosmetic repair, 25K for huge repairs
Carrying Costs = Mortgage Monthly Cost * (1.2) * 3
A Couple of Caveats here:
- If you don't know the closing costs in your area, just put 5% you will be safe with that number
- If you are not planning on fixing anything, just make estimated repairs 0
- If you are buying the property to be vacant, I am budgeting 20% (thats where the 1.2 comes from in the formula) for property taxes and insurance, and then you multiply it by 3 to get the total amount for the 3 months of savings for carrying costs.
1. Pick a city you would like to invest in *IF YOU DON'T KNOW WHERE YET DON'T BE DISCOURAGED. So pick a town you have been thinking of. You can come back later and do another one.
2. Go to zillow.com/research/data
4. For Data Type Select: "ZHVI All Homes(SFR, Condo/Co-op) Time Series ($)"
5. For Geography Select: "City"
6. Click Download
7. Open the Downloaded Spreadsheet
8. Freeze the top row of the spreadsheet TO DO THIS: On Mac: Go to View -> Freeze Top Row, On Windows: I don't have one, but its similar, step your game up and get a mac
9. On the spreadsheet, Ctrl+F to search for the "Town name".
10. Go to the last cell in that row on the right. This cell represents the last month's average sales price
11. Write that average sales price here.
12. Select a Down Payment Percentage for your loan This is your Down Payment Percentage Number. (0, 3.5, 5, 10, 15, 20, 25, 100):
13. How much did you want to set aside for rehab costs? (0K - None, 5K - Few Minor Repairs, 10K - Decent Repairs, 25K - A lot of repairs). This is your Estimated Rehab Costs number.
14. Calculate Your Closing Costs: .05* Home Value. This is your Closing Costs number.
15. Calculate Carry Costs or give yourself a round number: (0K, 2K, 5K). This is your Carrying Costs number.
16. Add Your Down Payment Amount, Closing Costs, Estimated Rehab Costs and Your Carrying Costs all together and you will get exactly how much you need!
Now, this is not meant to be perfect! Don't DM complaining that you went to buy a house that you did not have enough money saved for. Instead this is meant to be a guiding principle to keep you on track to actually have enough money to buy your first rental property some day, instead of never because you did not have a goal to go after!
Let me know in the comment what you think! Am I missing anything here? I am all about helping beginners buy their first investment property, so I hope this helps at least one beginner out there!
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