Saving money for real estate investing
May 9, 2013 | By admin |
How saving money for real estate investing affects your future net worth
We hear a lot about building equity in an asset (whether that’s a stock, property, or bond), but that can be a vague term for many. I like to think of it as dedicating a resource to something in order to watch it grow. At the most basic form, we dedicate our time into pursuits that we value. Many times this is referred to as “sweat equity,” since we are trading our time and effort for something that will be of much greater value later on. By leaving your money in a savings account or under the mattress instead of saving money for real estate investing, you are missing out on a great opportunity to create passive income. This money could be the “sweat” or effort that is put behind a project. Instead of building something to sell, you are using your money to house renters that will continually pay you more than what you put into the investment. In an abstract way, it makes no sense to put money into a savings account when you could invest in real estate. Your money is still relatively unavailable, it is still being used to pay for something, and its value continually decreases (as national interest rates rise). A final metaphor could be that of a garden. Those who save plant a few seeds and watch a few grow. Those who invest in rental property plant as many seeds as they can and likewise see many of them flourish.
One of the largest benefits of real estate investing is the knowledge gained. Filling out loan forms, rental agreements, and tax sheets will teach you more about the ins and outs of real estate than any book ever could. It will showcase why it is sometimes so challenging to get a deal done and why real estate agents act as they do. These experiences will prepare you for many different struggles to come.
The important part about saving money for real estate investing is knowing when your savings is large enough to put to use. The large amount of money needed to get into real estate investing is a double edged sword. On one side, this keeps the competition low from other would-be investors, but on the other, one must save a somewhat large amount even to put a down payment on a house.
Our recommendation in regards to saving money for real estate investing would be to have enough for the downpayment and any peripheral costs that could arise on your first property. A good rule of thumb is to save the downpayment + $5000. This means that if you need a new furnace or roof on the house, it’s no sweat, you can dip into this safety net. Even though this seems like a large amount, you’ll feel much more comfortable in your investment by preparing for the worst.
In summary, try to push yourself to save up for your first property. Your money will go much further in real estate than in a savings account. You will build equity, while learning about the market, and collecting rent checks. Do your future self a favor and save money for real estate investing rather than saving money under your mattress.