If you are thinking about investing in real estate, you have a lot of questions. You are probably wondering about the type of property to purchase, the geographic area to buy properties, rehabbing, leasing, property management, and flipping properties. However, the most common question we hear from new investors relates to how much money is needed to buy an investment property.
While the financial requirements for investing in a property can change from city to city, we have a general set of guidelines that will help you determine how much money you need to get started.
The first thing any real estate investor needs is cash. Many investors will have perhaps 20% of the cash needed for a project and borrow the remainder from a lender.
So, how much money do you need to purchase a property that will generate positive cash flow? As a rough guide, we suggest around $100,000.
We roughly break down the cash requirements like this:
- 50% to purchase the property.
- 25% for repairs.
- 25% in reserve.
So with $100,000, we would seek to purchase an investment property for around $50,000, rehab it for $25,000, and keep the remainder as a cash reserve.
Why Are Cash Reserves Needed
Although $25,000 in reserves may sound like a lot to a new investor, there are many different things that require cash.
For example, there are numerous expenses when purchasing a rental property that many people forget about.
First, new investors often forget they must pay taxes on the property, and forget to factor in the cost of insurance. When these bills come in, you want to have the cash reserves to pay them as a property investor.
Also, there are “unknowns” when purchasing an investment property. No matter how great the property looks on the outside, there’s no telling what might happen to it a year down the road. Therefore, we consider the first year with a new investment property as the “test year,” since it takes time to discover any issues that are not known at the time of purchase.
For example, the property’s air conditioning works great when you turn it on and run it for a day. However, there’s no telling what might happen to the AC when you run it 24/7 during the summer. If something goes wrong, you need to have the cash reserves to fix the problem quickly and keep your tenant happy.
What to Expect
In the first year of owning an investment property, expect to run into unexpected issues. Therefore, expect that profits will be lower the first year. You may get lucky with a property, but experienced investors always plan to deal with problems.
Also, you can expect to experience a 3%-4% jump in cap rate from year one to year two. So, if the cap rate on your property the first year is 6% or 7%, don’t panic. The first year is often spent dealing with the issues you inherited with the property and is a learning experience for you and your team. So, patience is required.
Although $100,000 in cash may seem like a high number, remember that you don’t personally need to have the entire $100,000. Many investors will have $20,000 in cash and get pre-approval for the other $80,000 from a lender.
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in Tampa Bay, helping real estate investors grow their wealth by putting equity to work.
Unlike other wholesale groups, we provide clients with a turnkey process at no extra charge. We find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years.