On today’s blog, we’re talking about how to save money! But trust me, this isn’t going to be a snooze fest telling you to have more self control in your spending, let’s get creative!
As someone with a passion for personal finance, I’m going to share some personal financial strategies I’ve tried on my own for you to consider, implement, and hopefully save up some money for your first property. I get it, a 5-figure down payment can be pretty intimidating. On a $100,000 single family investment property found in the Rent Retirement inventory or anywhere for that matter, we’re going to need $20-30K to fund this deal and secure a mortgage. If you’re currently spending everything you make, or worse, spending more than you make, you’re never going to get to that critical mass needed for a down payment! You need to take action today on your personal finances, and I’ll explain to you exactly how to do it.
Lenders need to know you have skin in the game when granting you a loan. It’s a lot of money! Lenders usually want to see a 15-25% down payment. If you don’t put at least 20% down, you may have to pay private mortgage insurance which is essentially just an insurance policy on your mortgage protecting against the risk of you not paying. It’s really up to you if you want to pay PMI with less money down or just continue to save for the full 20% down payment. In my opinion, the sooner you can buy real estate the better, so don’t sweat that PMI. Also, you can always refinance and get rid of PMI after you get up to that 20% equity position in the property.
Just remember, lenders are usually there to help you, so tell them honestly where you’re at with your finances and how you can create a strategy with them to get approved. After all, lenders often are not lending out their own money or at least not for very long, they are selling the mortgages into the secondary market that are often backed by the government. Lenders have to follow certain guidelines but the more loans they make, the more money they make, so they’re here to help you, just keep that in mind.
Today, I’m not going to say a word about cutting back on spending or not eating out as much because nobody wants to downgrade their lifestyle, especially not me, and the idea of tightening your belt is one of scarcity that most people will not stick to for very long. Sure, if you really want it and have the willpower to cut down your expenses big time, that’s amazing, but this blog is going to take another look at coming up with more money at the end of each month to fund your first deal. In my opinion, it’s not about being stingy, it’s about being smart! I hope these ideas will open up your mind a little to how easy coming up with a down payment really can be.
Banks and lenders consider income vs expenses as one of the most important metrics when approving you for a loan. In order to have a more favorable income vs expenses ratio, we’ll want to shift those expenses into the income category. The idea of offsetting expenses is this: although you have large liabilities in your life that you are required to pay such as rent, a mortgage, or car payment, you can find ways to offset those expenses, without having to get rid of those expenses entirely or like I said, downgrade your lifestyle.
Rent Out a Room
First, you could offset your housing expense by having a relative, friend, or even vetted stranger move into your extra room, guest house, or basement. This will result in a collaborative and flexible situation as you now have another person paying into your housing expenditure pot, freeing up around $600/month and much needed cash for your down payment. Another person in your household could also contribute to chores around the house such as lawn care, snow shoveling, etc.
This can offset the cost of those services if you once contracted them out. Furthermore, this additional family member for instance could split food expenses with you as food prepared in larger quantities can result in less cost per bite! If you want to do Airbnb for your spare bedroom or mother-in-law suite, hey, you can do that too! Look at all that offsetting you are doing and it’s a lot less of a hassle like downgrading to a cheaper housing situation would be.
Rent Out Your Car
Another way to offset one of your large costs every month is by renting out your car to cover your car payment or even make a little income above that. There are some great car sharing platforms out there such as Turo.com that allow users to share their car with others and make passive income from it. That $400/month car payment just got offset to $0 with your $400 in car rental income. This will mean another $400/month in your pocket and coupled with your housing expense offset, that’ll total to around $1,000/month.
Now we’re getting to our downpayment number faster! Remember, target those large expenses first like housing and car payments. Depriving yourself of a Starbucks coffee once a week for $8 isn’t going to make a very big dent compared to the $1,000 we just offset. Although those little nano-purchases like the iced coffees and Chick-Fil-A sandwiches can add up if you’re not careful.
Cash-Back Credit Card
Lastly, you can offset expenses and help your case for a loan by getting yourself a good cash-back credit card. You’re telling me to get a credit card to save for a down-payment? Yes! But under the assumption you don’t go rack up a huge ball of debt in a shopping spree! If you can’t handle a credit card, don’t get one. Banks are going to check your credit to see if you’re good with loans and credit cards are exactly that, an unsecured loan, or one that is not backed by collateral.
If you use a credit card responsibility and pay it off each month, lenders are going to love to see that and your credit score will go up dramatically. Not only will you get to build your credit, but this type of card will usually give you somewhere around 2% cash-back on all of your expenses. You can then choose for that cash-back to go directly into your savings account where you’re keeping all of your down payment money. It’s a great way to put a little money aside without even thinking about it… last year I made over $1,000 in cash back rewards!
“Hide” Money from Yourself
We all know saving is hard, but why is it hard? Because we can spend too easily! As Tim Ferris, author of the 4-hour work week would suggest, it’s important that we add “friction points” into our lives to stop behavior that we don’t want to happen. Social media comes to mind… delete those apps from your phone!!! I digress, but as far as saving for a down payment, you need to make sure you’re sacking away money before you can spend it.
This means having your direct deposit from work be deposited into a savings account and then having to manually transfer money to your checking account to spend. This could also mean only bringing a $20/bill out to the bar or dinner so you know that’s all you have to spend for the night. Think of yourself as a squirrel that hides away its acorns, and one day you come back ready to buy a nice squirrel house, and it turns out those acorns have turned into a beautiful oak tree. Nice.
Track Your Income & Expenses
Another psychological saving tip for you is to track all your income and expenses. You can use pen and paper to do this or automate this process by using mint.com or youneedabudget.com, either way works. The point is: things that get measured, get managed. Keep an eye on your finances at all times, and you’ll find yourself so much farther ahead in saving for a house than your peers that don’t. If these savings techniques and goals don’t resonate with you, please go back and watch my previous video called “10 WAYS TO FUND YOUR REAL ESTATE DEALS” which will show you how to buy investment properties with OPM or “Other People’s Money”.
Get started now with a call with one of our investment counselors at: firstname.lastname@example.org or schedule a FREE consultation.