Investing in real estate can make you a lot of money eventually, but saving up for your first rental property is going to take some time. Here's how to start saving.

Investing in real estate can be a great way to increase your income and build wealth.

If you’ve just entered the real estate game and are looking to buy a rental property, you’ll need to save up a decent amount of money first.

Here’s what you’ll need to consider when you start saving for your rental property.

How much can you afford?

This should be your first question before you even think about how much you could earn. You can use a mortgage calculator to help you determine this and you should specifically focus on a buy-to-let mortgage and not just an owner-occupied mortgage.

Buy-to-let mortgage lenders look at the potential property as an investment as opposed to whether you can afford to live there and pay the bills. This means you’ll need to focus on how expenses for the property will affect cash flow.

Realize that you’ll need to be honest with yourself in terms of what you can truly afford. You know what your income is, what savings you have, and how much time you can dedicate to managing and maintaining a rental property.

If you can’t afford to start out with a $250,000 property that you’ll need to pay property taxes on, don’t go that route. Instead, settle with something that fits within your budget.

Prepare to put down at least 20 percent

If you’re going to finance your rental property, consider the fact that you’ll probably need to make a down payment of at least 20 percent of the purchase price. Making a 20 percent down payment is not a universal requirement to obtain a rental property, but it is a requirement for many mortgage lenders, and it’s a good idea nonetheless.

You want to have some equity in your property right off the bat in order to cover all your bases and increase your potential profit in the future.

Keep in mind that you may also have to pay for additional expenses like closing costs, updates before renting the property, realtor fees, and insurance.

Consider how you will manage the property

You’ll need to think about how you’ll manage and maintain the property. Will you buy a multi-unit property? Will you hire a property manager if you buy a home that’s out of the area?

Do you plan on increasing rent each year to help cover repairs and maintenance expenses? Do you have the skills and experience to fix things when they break or will you need to outsource?

From the outside looking in, buying and owning your first rental property sounds like it can get pretty expensive and that’s because it probably will. However, I wouldn’t let that discourage you because buying an investment property can become a huge asset. You can diversify your income and use the money to send your kids to college, and even retire early.

So what are the best ways to save up for your first rental property?

Get on a budget

Getting on a budget is important if you want to improve your finances, but it’s crucial if you have specific savings goals you want to meet. A budget basically just tells your money where to go and helps you track everything more efficiently so you can maximize your income.

Budgeting is easier when you have a specific goal in mind, because instead of wasting money unnecessary things, you can prioritize that goal instead.

Creating a realistic budget you can stick to will help you gain more control over your money so you can funnel more of it into saving for your first rental property.

Automate savings into a high-yield account

If you want to save lots of money without thinking about it, start automating your savings. You can automate by using an app or by scheduling monthly or weekly automatic transfers from your checking account.

You’ll want to house your savings in a high-yield savings account so it can earn more interest faster. Most high-yield savings accounts that offer competitive interest rates are with online banks like Capital One 360, Ally, and Discover.

Live frugally

Living frugally means you can live well on less than you earn. Instead of giving into lifestyle inflation whenever you receive a raise or promotion, focus on keeping your expenses low and manageable so you can have more money to save.

Save lump sum payments

Another thing you can do to speed up the process of saving, is to save up lump sum payments you receive such as tax refunds, gift money, or a work bonus.

If you receive a bonus or incentive at work each month, get comfortable living on just your salary alone so you can stash the extra money away. If people want to purchase gifts for you for special occasions, tell them to deposit money into your rental property fund. Even $20 here and $50 there will really add up.

Sell stuff

Selling items you no longer want or need is a great way to earn money quickly. You can have a huge yard sale, list items on Craigslist or the Facebook marketplace, or even sell your items on Amazon or eBay.

Get a side hustle

Finally, you’ll want to consider getting a side hustle to help you save up money for your first rental property.

You can tutor online, write articles, do graphic design work, photograph events, test out websites for cash, repair cars, babysit, walk dogs, or drive for Uber or Lyft. The list is endless.

Even if you work one or two days per week and earn around $150, that’s $600 extra per month, or $7,200 per year!

Summary

While saving up for your first rental property can seem quite challenging, it’s not impossible and there are plenty of ways to plan and save. Try to stick within your budget, live frugally, and earn more in order to accelerate the savings process.

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