Down payment makes up a huge chunk of a property’s total sale price, so it’s generally what holds people back from being able to own real estate.
The amount, after all, comes in thousands of dollars, which is not that easy to gather.
For example, if the property you’re eyeing is $200,000 and the down payment is at 24 percent, then you have to cough up around $48,000.
If, on the other hand, its $250,000 and the down payment is at 15 percent – which is the average in the United States in 2015, according to RealtyTrac – the down payment would be around $37,500.
If you’re one of those who are dreaming of having your own place under the sun but think that you can’t possibly save enough – or earn enough – to get one, then you may find the following tips useful.
What is the Secret to Having Real Estate?
The secret to being able to afford the down payment for a lot, house, condominium, or other real estate boils down to one thing: savings.
Saving money is difficult for many people, however. There are individuals, even those with relatively huge incomes, who are not able to set money aside regularly and what little they do save, they often take out to fill up other financial needs.
The U.S. Federal Reserve said that in 2014, 47 percent of Americans could not even afford a $400-emergency because they didn’t have enough savings.
Often, the reasons for not being able to save are bills, loans and debts, and daily expenses. People think to themselves that what they’re earning is not or is just enough to live by, and that they will start saving when they get a promotion, a salary increase, or when they finish paying this or that creditor.
The thing is, an increase in income often means an increase in expenses, too.
Now, while income and expense certainly play a big part in how much you are able to save, the practice of actually saving is, in a sense, a different story.
Regardless of how much or how little you earn or how much your bills are, if you don’t get into the habit of saving, it is less likely that you will ever have enough for a down payment.
How Can Your Afford a Real Estate Down Payment?
Your savings need not to be a lot in a short amount of time, but you can certainly save faster if you can practice smart spending and shave off unnecessary expenses.
It’s also important to set your sights at what you want to achieve – in this case, to get a place of your own. Here are some ways you can do this:
Put it this way: if you are able to set aside money to pay for your phone or car, to settle your bills monthly, or to buy a cappuccino every morning, then why can’t you set aside some for your savings account?
In other words, you should make your savings a part of your budget in the same way that you do your bills and loan payments.
To do this, imagine that you’re already paying your mortgage even though you’re still renting a place.
To illustrate: if your monthly rent is, say, $1,000 and the mortgage in the neighborhood you like is around $2,200 per month (including taxes, insurance, and other expenses), then you should set aside $2,200 in your housing budget.
From that, take $1,000 for your rent, and save $1,200 towards your future property.
This way, not only will you save more, you will also get the “feel” of paying mortgage and adjust your budget accordingly.
Set Up a Separate Savings Account
It’s best to have a separate account to keep your down payment savings. Make it hard to withdraw from – that is, don’t attach an ATM card or a credit card to it – and it should not be readily visible.
Also, when you make a deposit in that account, forget that you even have the money. Treat it as though you have paid it to a biller or creditor. This will keep you from being tempted to take out your savings for other purposes other than toward your down payment.
Once you have an account, it’s best to automate deposits every month. This not only keeps you from not making the deposit, it will also look good on your bank records.
Save Extra Money
Whenever you receive extra money, such as a bonus from work, an unexpected gift, or tax returns, put it in your down payment savings.
You don’t have to put the whole amount – you can leave some to treat yourself – but prioritize your dream house.
If you get raise, then you may want to do this: continue living within your old pay and save the increase. For instance, if you receive a $200 raise, forward it to your down payment savings instead of putting it in your shopping budget.
Alternatively, you can use part of this for paying off your loans in order to free you from debt sooner.
Living frugally does not mean being a miserable miser like Ebenezer Scrooge of Charles Dickens’ “Christmas Carol”; it means being prudent and cautious on how you spend your money.
You can use a spreadsheet to list down your expenses and see how you can cut down. For example, if you spend much for dining out, then you can decide to cook at home more and go to restaurants less.
If you have a landline that you don’t actually use or need, then you may want to have it cut; or if you have a cable TV subscription but you only watch for an hour a day, then you may want to unsubscribe.
You can also try to set small, achievable goals each month in order to raise additional money or slash your expenses.
For instance, in the first month, you can challenge yourself to start cutting down on electricity bills – start getting into the habit of unplugging all the appliances that are not in use and air drying your laundry.
The next month, you can start walking, jogging, or biking around the neighborhood or getting into a sport rather than go to the gym.
For the third month, you can start bringing packed lunch to work instead of eating at the nearby café.
You should also start using coupons and promo codes. Buy during sales, look for items at thrift shops and consignment stores, purchase in bulk – these are just some ways you can save a few cents. Remember, even small amounts can add up.
Improve Your Credit Score
Debts are among the top reasons why people find it hard to save. Not only do they take much of your income, they also accrue interest.
Missing out on a payment causes the interest to grow even more, and doing so would also hurt your credit ratings.
It goes without saying, being debt-free would allow you to feel better. For one, you know your income is yours rather than your creditors’; two, you can see your hard-earned money going to something in the future, not in the past. So, for the present, do your best to get rid of your debts.
There are several ways to do this, such as: keeping only one or two credit cards, if you really need them; choosing to pay in cash and not using plastic unless it’s really necessary; not committing yourself to new debts, such as getting a new sassy phone on installment just because it’s the “in” thing; and so on.
Learning how to properly manage your credit can prove helpful in your dreams of owning property. Building a strong credit rating could later mean a higher credit limit, lower interest rates, among others.
It would be good to mention here that while the down payment makes up a huge percentage of the property’s selling price, the total interest over time is likely to vie for the spot of the most expensive part of buying real estate.
And because interest rate is usually determined by your credit score, it would be wise to improve it starting now.
Live with People
If you can find a place that has low rent, you would be able to save more for your future house.
Better if you can share the apartment with a roommate, since you will both be pitching in for rent and utilities.
Another option is finding a relative who would be willing to take you in for a minimum monthly contribution. Conversely, you can rent out a room in your place, such as via AirBnB and similar marketplaces to add to your income.
Increase Your Income
There are many other ways for you to have more earnings; you just have to be open to the opportunities. For instance:
· You can go on overtime if the company you work for allows it.
· You can take on a part-time job, either in a physical workplace or home-based. For example, if you can write, do freelance writing.
· You can start a small business. If you have a passion for baking, then why not make and sell cookies and cupcakes? If you can sew, make small products that you can sell, such as hair accessories or stuffed animals.
· You can initiate carpooling. You can offer this service to your workmates so you can have some extra money to pay for your gas.
· If you have another car, utilize car-sharing services like GetAround.
You can likewise sell old items you no longer use via consignment stores or eBay.
This will not only free up more space in your place, it will also earn you some money from things that would otherwise just gather dust.
Also, make sure to remind people who owe you money to pay you back.
Look into putting your savings in money-making investments like index funds. These often earn more than ordinary savings accounts.
If you’re into buying an investment property – one that you intend to rent out or resell later – then you may want to find a partner who will share with the down payment.
This, of course, means sharing the income.
To help you maintain your focus on your goal, set up a reminder that you can see everyday. For example, you can hang a picture of your dream house in your bedroom, living room, or office.
You can also do some kind of countdown – make a chart that begins with your target amount, subtracting from it the deposits you make into your down payment savings.
This way, you become more mindful of your money, how you spend it, and how you inch closer to your dream every time you save.
With your focus set on, you will be less likely to buy on impulse, knowing that senseless purchases would only serve to delay you from achieving it.
Along with staying focused is being realistic. While it’s okay to aim high, you should also remember to keep your feet on the ground. See what kind of property would suit your needs, preferences, and lifestyle.
Also, find out which you would be able to truly afford – not just the down payment but also the mortgage and the kind of living in the neighborhood.
After all, you wouldn’t want to live in a community where you have to always “keep up with the neighbors” – that will just ruin the enjoyment and satisfaction you should be having at being able to buy your very own house.
If reading home magazines and watching shows that feature houses of the rich and famous make you feel frustrated and dissatisfied, then you’d be better off not looking at them.
There are many more ways for you to be able to save more money towards the down payment for your future real estate property. They do require a bit of sacrifice, some creativity, a lot of determination, and laser focus on your goal.
Done right, you’d be glad later on, especially when you sit and relax in your very own porch.