SEP 6, 2016 @ 11:59 AM The Little Black Book of Billionaire Secrets
Brandon Turner , CONTRIBUTOR
I show how anyone can succeed at residential real estate investing.
Opinions expressed by Forbes Contributors are their own.
It was backbreaking work for a five-year-old — but it was totally worth it.
I spent six grueling hours cutting down brush in my backyard with my dad, clearing an area that would soon become a place for Mom to send us when my siblings and I were being too loud in the house. When we finished clearing the brush, he handed me a crisp five-dollar bill. It was so much money I tried giving it back to my dad, assuming that my family wouldn’t be able to eat for a few days because of his immense generosity toward me.
Of course, he made me keep the money and used it to teach me about the power of saving money. So I put that money in a bank and continued to save – until I had $20.
Then I blew it candy, comics, or some other pleasure that I’m sure felt worth it at the time.
I realized then – I was terrible at saving money!
Like my five-year-old self, most Americans have a hard time saving money. An increase in income usually results in an increase in spending. In fact, according to the U.S. Federal Reserve, 47% of Americans do not have enough savings to cover a $400 emergency.
Savings, however, are incredibly important, especially if you are looking to someday buy a house or get an investment property loan. RealtyTrac recently reported that the average American down payment was around 15% in 2015. With the median sales price for a house hovering around $250,000, house buyers may need to save $40,000 or more to buy a house. Even low down mortgages like an FHA loan can cost you 3.5% plus closing costs, requiring $10,000 or more.
So, how can people save up the massive down payments needed to purchase a property? Rather than getting just my ideas and opinions, I asked this question to a variety of financial writers and bloggers to share their top tips, which you’ll find below.
1. Prioritize It
“I think people need to get laser focused and remember their value system with every purchase. Every time they make a purchase (at Target), they need to realize that the foolish purchase is making their goals get pushed further and further away. They need to make their spending a reflection of their value system and put that down payment at the very top of their value list.”
Lauren Greutman | Author of the book The Recovering Spender, Financial Counselor, and Founder of LaurenGreutman.com
2. Automate It
“Create a separate savings account and name it ‘down payment.’ Automate savings deposits from your paycheck or checking account into the account each month. Start with a small amount and increase the amount over time once you get comfortable with the process. Banks require a down payment for a reason; they want to know that you are financially responsible enough to live within your means. Prove it!”
Phillip Taylor, CPA | PTMoney.com, Founder of FinCon
3. Gamify It
“We had monthly challenges to raise money for our down payment. Keeping things friendly, relatively short, and competitive motivated us to build up our savings faster.One month was about recurring bills. We dug around and managed to slash our car insurance in half, get faster service with our internet (and shave some money!), and cut the cord while still catching our favorite shows.”
Elle Martinez | CoupleMoney.com
- Set Aside Unexpected Money
“Put any extra unexpected money into the down payment fund! I.e. Christmas money, birthday money, bonuses, tax returns. It will snowball before you know it.”
Tiffany Alexy | TiffanyAlexy.com, Real Estate Broker & Investor
5. Build a Side Business
“The best way to save money is to supplement your income with a small business or side hustle. Most of us work 40-50 hour weeks, which means that there’s plenty of time to make some extra money on the side. For example, you could sell on eBay or freelance. With the law of compounding interest, every little bit counts.”
Steve Chou | Bumblebee Linens and MyWifeQuitHerJob.com
6. Budget for It
“The best way to save for your down payment is to build it into your budget. Start by determining what your monthly house payment will be, then subtract your current mortgage or rent from that number (tip: don’t forget to add homeowner’s insurance and taxes to your expected mortgage payment!). For example, if you expect to spend $2,000 per month on your mortgage and your rent is $1,200, you will save $800 per month. Not only will this help you save for your down payment, but it will solidify your future mortgage payment in your budget. This will help you make sure you can afford your mortgage once you buy your home.”
Ryan Guina | CashMoneyLife.com
7. Increase Your Income
“When my husband and I were building up for our down payment, we did the following things:
- Looked for ways to increase income. In particular, I took on some overtime at my full-time job.
- Bumped up my rates for my freelance work. When I realized that I needed to get to $42k for our down payment, I started to increase the rates for my services since I couldn’t create more time for a ‘by the hour’ service.
- Asked for repayment of loans that I made. When a friend or family members knows that not repaying you is literally taking you out of house and home, there’s more urgency attached to repayment.”
Kara Stevens | The Frugal Feminista
8. Live with a Roommate
“When I was saving for a down payment, I lived with roommates for a couple of years instead of getting a place of my own. I was just out of college so I didn’t mind the discomfort since it was what I was used to anyway. It wasn’t perfect, but allowed me to save $500 per month.”
Pauline Paquin | ReachFinancialIndependence.com
9. Maximize Earnings on Your Stuff
“Perhaps you have a spare room that sits empty. You could earn income by renting that room out, on your terms, through a service like Airbnb. Got items sitting around the house that you don’t use and will never use? Sell those items on a site like eBay or take them to the consignment shop. Do you have a vehicle that is just sitting around in your driveway doing nothing? You can rent that vehicle out using a peer-to-peer car sharing service like GetAround.”
Anna Sergunina, CFP | Money-Library.com, AdviceOnly.Net
10. Rent Cheaply to Save Up
“Rent for cheap and save up! My wife couldn’t find a job when the real estate market tanked. We had just moved to Texas and thought we would be staying with my in-laws for 2-3 weeks. She never found a job, and we ended up paying $430/month for one year for a bedroom at the in-laws’ house. We saved up 50% for the down payment on a new house.”
Scott Alan Turner | Financial Rock Star Podcast, ScottAlantTurner.com
- Think Long-Term
“The trick is giving up short-term desires (eating out, expensive vacations) for the long-term goal of a home. So hang a picture of your dream house where you’ll see it everyday. Then put aside money in a separate account immediately on payday.”
Rob Berger | DoughRoller.net
- Out of Sight, Out of Mind
“Open an account outside of your normal day-to-day financial institution (free of fees, of course) that you bank with. Reducing visibility and minimizing accessibility to the funds is critical to staying focused on the savings goal. Why do you think traditional piggy banks had to be broken in order to access the money? If they were ‘see through’ and you had easy access to the coins inside, you probably wouldn’t save any money. Same concept here. Out of sight, out of mind!”
Taylor Schulte, CFP | DefineFinancial.com
- Pay Off Debt to Maximize Savings
“Actually, I’m a fan of the 100% down plan. When we finally got out from $500,000 in debt in 2009, we were really able to save. Since we were making HUGE payments at the end of our debt of $3,000/month (almost all of our money), we found that we could really start saving. You got it, in just 3 years we had enough to buy another house. Huh? Six years a $200k house, double huh? Think of the possibilities.”
Christine Odle | ChristineOdle.com
- Be Realistic
“It’s also important to be realistic about what kind of home you can afford. Watching HGTV’s House Hunters might not be in your best interest if it just causes house envy and causes you to be dissatisfied with homes in your budget.”
Mike Delgado | Experian
- Live Frugally
“Live as frugally as possible. Cut out items that provide for the “latte factor.” You’ll be surprised how much money you can save just by staying in more and eating out less. Buy used whenever you can until you save enough money for your down payment goal. Go over your income and expenses, cut as much as you can. Set aside a set amount to save every month to contribute to your down payment. Though it make take some sacrifice and a bit of time to save up, it’ll be worth it in the end.”
Rachel Hernandez | AdventuresInMobileHomes.com
- Use Your Work Raises and Bonuses
“My favorite way to increase how much you’re saving is to do it each time you get a raise (or bonus). Figure out how much the raise increases your paycheck, then set up an automatic contribution to savings in that amount, or half that amount. Do it with the first higher check so you never get used to that higher amount (even a little taste can make it harder to do this later).”
Arielle O’Shea | NerdWallet.com
- Use Partners for Investment Properties
“For investment properties, I like to use partners and private lenders for my down payments. I find a good deal, they put up the cash, and we share the profits. Sometimes it’s a 50:50 split, and other times, I pay them interest. It’s worked well for 14 years!”
Chad Carson | CoachCarson.com
- Stay Focused
“My tip is to be focused. Saving up enough for a down payment is going to take some time. Because of this, you have to stay focused throughout. Always keep in your mind your goal. When you are out shopping, question a purchase as to whether or not you really need it.”
Jon Dulin | MoneySmartGuides.com
- Look Beyond the Down Payment
“The most expensive part of buying a home is not necessarily the down payment, but the interest rate you will pay over the life of the mortgage. Your interest rate is determined by your credit score, and that can mean the difference between affordability and a cash hemorrhage. It pays to check your credit score early to make sure all is accurate, and allow yourself time to improve in order to qualify for the best rates.”
Megan Brinsfield, CPA, CFP | FoolWealth.com
- Master Your Credit
“Finally, treat credit cards as an important tool in your journey to homeownership. It can take a while to figure out how to use it correctly (I’ve definitely stumbled), but building strong credit now helps you get lower interest rates, approval for higher credit limits, and better credit card rewards and insurance rates later. Start learning how to properly manage your credit early on.”
Lisa Rowan | ThePennyHoarder.com
When I was five, it was tough to save a lot of money. And today, for a lot of people, it’s not much easier.
However, if your goal is to purchase a home or investment property, it’s time to get serious about your saving up of a down payment. Use the 20 tips above to start increasing your savings today.
Finally, if you have other tips for people trying to save up a down payment, be sure to leave a comment on this post and let the world know.
Brandon Turner is an active real estate investor, author of The Book on Rental Property Investing, and the co-host of the Bigger Pockets Real Estate Podcast.