Coming up with the down payment is probably the biggest impediment to lawyers and professionals who want to buy a rental property.
If you’re serious about acquiring a rental property and are worried about the down payment, these tips will help get you moving in the right direction.
Each of these strategies involves some sort of trade-off.
There are no short cuts.
In the end, the trade-offs are well worth it. Owning real estate is one of the best way to accelerate your journey to financial freedom.
Let’s take a look at my list of the best ways to come up with a down payment for a rental property.
1. Increase your saving rate.
Do you know what your current saving rate is?
Your saving rate is simply the amount of money you save each month divided by the amount of money you make. I find it most useful to express your saving rate as a percentage.
Saving rate % = (Money Saved / Money Earned) x 100
Just like staying on budget with two simple numbers, you can monitor your saving progress with this simple formula.
In a moment, I’ll show you the math on how to quickly improve your saving rate whenever you earn a pay bump.
You might be surprised to learn how many lawyers and professionals out there make a lot of money and maintain a very low saving rate.
If your current saving rate is under 20%, you have a lot of room to improve.
It’s not uncommon for people striving for financial freedom to have a saving rate of 50% or more.
By the way, when I first start tracking my saving rate in my 20s, I had a negative saving rate.
I was spending more than I was earning. If you’re currently in that position, it’s not too late to make some changes.
If you’re serious about coming up with the money for a down payment, your saving rate is the place to start.
2. Revisit your Budget After Thinking.
If your current saving rate is under 20%, it’s time to look closely at your Budget After Thinking.
If you haven’t created a budget before, the first step is to track your spending for three months. The goal is to find out where exactly your money is going.
You may learn that you’ve been victim to the disappearing dollar.
Once you have a decent idea where your money is going, the next step is to look for areas where you can reduce your spending.
Ask yourself, “what spending is truly important to me and what spending can I cut?”
As you start spending less and your saving rate improves, every additional dollar should go in a separate savings account earmarked for a future down payment.
3. Don’t spend your pay bump.
Most lawyers and professionals have the opportunity to earn bonuses, commissions and raises throughout their careers.
When you receive one of these pay bumps, don’t spend the money.
Pretend like you never got it.
Deposit this money right away into a separate savings account labeled “Down Payment Savings.”
Here’s an example of how much your saving rate can improve when you don’t spend your pay bump.
Let’s assume that before your raise, your take home pay was $70,000 per year after taxes and retirement plan contributions.
Let’s also assume you were putting $1,000 per month towards your down payment savings.
Using our saving rate percentage formula above, we see that:
- Money Earned = $5,833 per month ($70,000 / 12)
- Money Saved = $1,000 per month
- Saving Rate = $1,000 / $5,833 = .17
- Saving Rate Percentage = 17%
17% of your take home pay for a down payment is pretty good.
Now, let’s see what happens if you earn a $20,000 raise and save your entire raise for your down payment.
With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month.
Look what happens to your saving rate percentage when you add the full raise to your down payment account instead of spending it:
- Money Earned = $7,000 per month ($84,000 / 12)
- Money Saved = $2,166 per month
- Saving Rate = .31
- Saving Rate Percentage = 31%
You more than doubled your monthly down payment contributions and improved your saving rate to 31%!
Not spending your pay bumps is one of the fastest ways to accumulate enough money for a down payment on a rental property.
This is exactly how my wife and I saved enough money to buy our four rental properties. It’s how we’re going to buy our next rental property.
Whenever we earn a pay bump, we pretend nothing happened. We tell ourselves the money isn’t ours, yet. We put it in a separate savings account right away.
Once we have enough to buy another rental property, we’ll go shopping again.
4. Take on a partner.
Many beginner real estate investors don’t have the money for a down payment on their own. One solution is to take on a partner.
There are a lot of lawyers and professionals out there who want to invest in real estate but don’t want the hassle of finding a deal and being a landlord.
That’s where you come in.
You can offer to do all the work and your partner can put up the initial money. Then, you both share in the profits.
If you go this route, make sure you’ve done your homework on evaluating potential properties. When you approach a potential partner, it’s important to demonstrate that you know what you’re doing.
5. Ask Mom and Dad for help getting started.
A recent study showed that half of parents provide their adult children with regular financial support.
If your parents are in a financial position to assist you, it might be worth having the conversation with them about partnering up on a deal.
The same as working with any other partner, your job is to do your homework and illustrate to your parents why buying a rental property is a sound investment.
If you show them that you’re serious about reaching financial freedom through real estate, you’ll have a better chance of convincing them to partner with you.
The advantage of partnering with your parents is that you should be able to get better terms than you would on the open market.
Some people are too proud, or too deferential, to ask their parents for help. I understand it can be a sensitive topic.
I also strongly believe that we all benefit when we talk about money with our loved ones. Even if your parents are not in position to help you directly, they may have other ideas to help you get started.
Talking about money is not taboo. If you can’t talk about money with your parents, who can you talk to?
6. Get a side hustle.
If you’ve successfully created a budget and still need to generate more fuel, have you thought about a side hustle?
Some lawyers and professionals reading this won’t even allow themselves to consider a side hustle. They automatically think, “I’m way too skilled or busy to even think about another job.”
In my personal finance class, we spend a lot of time challenging that notion.
Very few people- and I mean very few- are too important or too busy to take on a side hustle.
For most of us, it’s an excuse.
You may think you’re one of those “too important” people.
I would challenge you to assess whether you’re confusing “too important” with “too stressed” or “too tired” or “too cool.”
Is continuing to worry about money really better than spending a few hours a week earning extra money doing something you love?
The ideal side hustle is something you enjoy doing that can earn you extra money at the same time.
Some examples of side hustles my students have come up with in class include:
- Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.
- Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
- Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
- Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
- Part-time Property Manager. Is there a better way to learn the business and make some money on the side than being a part-time property manager?
7. Use a HELOC.
Using a HELOC to buy investment properties is one way real estate investors scale quickly. I’ve used a HELOC to help buy investment properties three separate times.
A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.
Think of a HELOC as a second mortgage on your property. Just like with a primary mortgage, when you open a HELOC, the bank charges interest and is protected by the equity in your home.
You can use a HELOC as you would use cash, including for a down payment on a rental property.
Once your HELOC is open, you can use the funds as you would cash.
All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.
With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.
This is a huge advantage if you want to use a HELOC as a down payment to buy an investment property.
That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a down payment.
On the other hand, cash advances from credit cards are typically not allowed for a down payment on a conventional loans.
For a deep dive into how I’ve used HELOCs three separate times to help buy rental properties, check out my post here.
8. Consider a low down payment loan.
There are numerous loan options available that require low down payments, or even no down payments.
Here are some of the more common low-down payment loans:
- 3% Conventional Loans. These are loans backed by the federal government and include Home Possible and HomeOne loans. I used a Home Possible loan to acquire my first rental property.
- FHA Loans requiring as low as 3.5% down. FHA loans are also backed by the federal government and require a down payment of as low as 3.5%.
- VA Loans and USDA Loans. These are both excellent loan products offering low down payments for those whoa re eligible.
Besides these government-backed down payments, there are various private loan programs available that offer low down payments.
With all of these loans, keep in mind that there are eligibility requirements that limit the accessibility of these programs. There are also additional fees and costs that need to be considered.
The key is to do your homework and work with a mortgage broker who is well-versed in the available options for your personal scenario.
Have you considered any of these options to help acquire a rental property?
Coming up with the down payment is probably the biggest impediment to lawyers and professionals who want to acquire a rental property.
If you’re serious about acquiring a rental property and are worried about the down payment, these tips will help get you moving in the right direction.
Remember that buying and holding rental properties is a long-term game. If it takes you a couple of years to save enough for a down payment, that’s OK.
The best real estate investors understand that owning rental properties is not a “get rich quick” strategy.
Stay patient, save money, and your portfolio will grow immensely over time.
Have you used any of the above strategies to acquire rental properties?
What other strategies have you used?
Let us know in the comments below.
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