This article is a follow-up to one wrote previously about buying your first investment property.
In this article I discussed the important considerations an investor needs to make before taking the leap and making the purchase.
Today we’re going to discuss saving up for your deposit.
Both of these articles were inspired by a comment I received that asked me how I was able to buy an investment property in my early 20’s. If I were to answer that question in only a few words, it would be -
research, plan, and save like hell.
Unfortunately, you don’t earn royalties from writing only a few words, so what follows is a much longer version of that sentence where I’ll elaborate on my point.
Less is More
By now you should know exactly how much money you need to save up before taking the leap and buying your first investment property, a figure that could be anywhere from $20,000 to $200,000.
I hope for your sake that the figure is as low as possible, especially when buying your very first investment property.
What some people can easily forget is that they’re not buying the property to live in, they’re buying the property as an investment. This means that you don’t need a “love connection” with the house before deciding that it must be yours.
In fact, you should never feel too attached to any property, no matter how beautiful or well decorated.
Falling too hard for a property may take away your ability to low-ball the owner, or negotiate a fair price.
Remaining unattached to your property also means not planning any expensive renovations. Buying a property, then immediately sinking tens of thousands of dollars into renovations will change the profitability equations we worked so hard to calculate.
Adding more debt may turn a positively geared house into a negatively geared one, and all because you wanted marble flooring. A new coat of paint and some fresh curtains are all you need to breathe life into a dated but financially healthy property investment.
Also, we can never forget that the rent must cover the mortgage payment each month. This means ensuring that the price is low enough to make sure that’s possible.
Saving For Your Dream
So now that we know we want an inexpensive property, we should have a mortgage deposit goal that is $100,000 or less.
Saving for an enormous goal can feel impossible, and it’s that feeling that dissuades us from even getting started.
If your savings goal is $80,000 for the perfect investment property deposit, it’s best not to look at the full $80,000 when writing your plan.
Instead, begin by looking at your monthly budget with the eye of a serial killer. Take out your sharpest scythe and slash like you’ve never slashed before.
As Kevin O’Leary says, we eat beans now so that we can eat steak later. With that motivation, slash your budget to the bone, leaving no luxury alive.
Until you achieve your deposit goal, your new focus is putting as much of your monthly income away into savings as possible.
Once your monthly budget has been re-written, you’ll know exactly how much you can set aside from your salary each month. Once you know that number, break your $80,000 goal into monthly pieces so that you know exactly how long it will take to achieve.
After reforming my budget in this way, I spent 8 months working to achieve the goal I set. I lived in a crappy apartment with 5 other roommates, ate crappy food, and cut my social life to nothing.
By strictly following my new budget I knew that my goal would take exactly 8 months. Knowing that there’s an end in sight makes it so much easier to set and then achieve your goal.
If your goal is $80,000 and you can afford to set aside $2,000 each month, stay focused on doing whatever it takes to achieve the goal each and every month.
With this scenario, it would take you 3 years to achieve your goal, which would probably feel too difficult. The key to succeeding will be minimising that time by shredding your budget as much as possible.
If you’re earning $4000 a month, your savings during this time should ideally be more than $2,000, they should be closer to $3,000 if possible. (Certain factors may make this impossible, such as having dependants or health issues). But if you’re young, healthy, and have no dependants, there are no excuses. Live with roommates, eats noodles, and enjoy minimal luxuries. Raising your monthly commitment from $2,000 to $3,000 will lower your 3 year goal to 2 years.
Low-balling the Seller
From here, the way you can reduce your time spent saving will be by either finding a cheaper house (that still meets all your requirements) or by making an offer that’s far lower than what’s being asked.
Making a low-ball offer is easy, and you shouldn’t feel embarrassed making it. This is one of the most important transactions of your life and there’s no shame in trying to get the best deal possible.
If you’re searching for your new property online, get in touch with the real estate agent through the website contact form and be immediately up-front about your intentions.
Tell the agent that you’re very interested in the property, and ask whether they’d be willing to accept an offer of (insert low-ball figure here). Agents will usually respond to your candid question with a very upfront answer. They’ll either say no and wish you a good day, or they’ll say that they just have to check with the owner.
In my opinion, you can never fill out too many online forms.
Send dozens of messages to agents everywhere making offers and talking deals.
You have nothing to lose by enquiring. Make insane offers, to which many of the sellers will reply (through the agent) with a counter. Some will counter with a number that’s basically what they were originally asking for, but a few will counter with a number that you can work with.
With my second property, the owners accepted my ridiculous offer without even countering.
I was still months away from being finished with my savings, but the reduction in price meant that I was able to buy the house on the spot.
Although with my second house I barely saved any money at all because I bought the house using equity from my first house (something we’ll discuss in a future article).
Save, Save, Save
Saving as hard as you can in combination with making low-ball offers will see you buying an investment property in the fastest possible time.
Make sure the numbers work in your favour, and don’t stress about whether or not the wallpaper matches your wardrobe (a complaint I’ve really heard before). It’s always better to ensure that the numbers match rather than the colours.
Set a goal and stick with it, and before long you’ll have an investment you can be proud of.
Disclaimer: This article does not constitute financial advice. If you’d like proper advice before making an investment, seek out a registered fiduciary financial advisor for help.