Saving for Down Payment for Your Next Rental Property? Where You Should Keep Funds
Saving up for your next investment property can be a challenge. And choosing where to keep your down payment funds is a key part of real estate success. Should you keep your savings in a bank or money market account, or invest your money and hope for higher returns? The short answer to this very important question is: it depends. Each situation is different, and what is right for you may be different than the approach taken by other investors. Where you ultimately choose to keep the funds you are saving for your next rental property depends on a range of factors, including your ability to diversify, your risk tolerance, and the timing of your next investment. By having a clear vision of your investment goals and these three factors, you can more confidently decide how to keep and grow your down payment funds.
In many ways, deciding where you keep your down payment funds depends on how accessible you need your cash to be within a certain timeframe. Generally speaking, the shorter your timeline is, the less diverse and risky your savings strategy should be. For example, if you plan to purchase a rental property within the next year, your risk tolerance will be much lower and your need for liquidity higher than if you plan to purchase a property five years from now. For many investors, this may mean keeping their down payment funds in a savings or money market account to keep their money safe from short-term market fluctuations. While such savings options will not help you grow your funds – most interest rates are well below inflation – there is little to no risk of losing money on a volatile stock or fund.
A short-term investing plan does not need to mean a lack of diversity in your funds, however. To help boost savings, many investors diversify into CDs and treasury bonds, which are two other relatively low-risk ways to accumulate down payment funds. These types of funds are a particularly good option if your next investment is more than a year in the future. Part of the reason for this is that many CDs and bonds require you to hold them for a certain amount of time. Another is that setting your savings apart will give it time to earn interest and help you stay ahead of inflation, housing price increases, and other changing market conditions.
If your investment plans include a long-term strategy and your next investment is a few years away, your approach to saving money may look quite different. For example, while investing in the stock market does carry a higher risk, it will also allow you to diversify into index funds. Index funds, unlike other types of stock, can be a great way to grow your savings at a faster rate and ensure that your money isn’t losing value sitting in a low- or zero-interest savings account somewhere. To reap the rewards of index funds, however, you need to be willing to lose access to your money – at least temporarily. As a rule, the more risk and less liquidity of your funds, the bigger potential returns you could see. For these reasons, it’s clear that timing really is the driving force behind how to handle your down payment funds. The one thing that investors should avoid at all costs is not having a clear business plan. Knowing how much down payment money you’ll need and when can help you make smarter and more profitable decisions with your savings. At Real Property Management, we assist rental property investors with the information and services you need to reach your financial and business goals. Contact your nearest Real Property Management office today for more information.