Saving for Down Payment to purchase your dream Rental Property?
Investing in real estate can be a significant way to increase your income and build wealth. If you’re going to get a mortgage for your dream rental property, consider the fact that you’ll probably need to have a down payment of at least 20 percent of the purchase price, in addition to the 2.5% closing cost in Toronto.
With an average property price of more than one million dollars in Toronto you need more than 220K to close the deal. Saving up for such money for your next investment property can be a big challenge and choosing where to keep your down payment money is a key part of real estate success.
Should you keep your savings in a bank, invest your money in the financial market, or buy gold and silver and hope for higher returns?
Where you choose to keep your cash for your next rental property depends on a variety of parameters, including your budget, accessibility, skills to diversify, risk management knowledge, economics situation and the time of purchasing your next rental property.
By having a clear-sighted view of your investment target and these six factors, you can more confidently decide how to keep and grow your down payment money.
Short-Term Strategy
To help boost your fund and stay ahead of inflation in the short term, two popular options for investors diversify into Certificates of Deposit and Treasury Bonds since they’re low risk investment financial derivatives that may pay slightly higher yields than traditional savings accounts. With both of them, your money will often be tied up for a certain amount of time in exchange for a fixed rate of return.
What are the Certificates of Deposit?
A certificate of deposit (CD) is a savings product that earns interest on a lump sum for a fixed period of time. Virtually every bank, credit union, and brokerage firm offers a menu of CD options.
CD terms typically range from three months to ten years. The top 5 financial institutions available CD rates are typically 3 to 5 times higher than the industry average for every term. So, shopping around is a good idea before making a decision.
What are Treasury Bonds?
Treasury bonds are fixed-income securities that are essentially loans from citizens to the government that are paid back with interest. They vary in their length of maturity (the time it takes to receive the face value) and the interest rates they pay. The tradeoff for less risk, however, is a lower expected return.
Long-Term Strategy
Long-term investments are assets that an investor intends to hold for a period of more than three years. If you’re thinking about your investment plan being a few years away, you should be saving and investing money in a different way. Right now you know your goal, your time frame for achieving it, and how much risk you’re willing to take as an investor.
The main types of long-term investments are stocks, bonds, mutual funds, ETFs:
- Stocks
Stocks are equity securities that represent ownership in a company. Shares of stock give the investor or shareholder a claim on the company’s earnings as well as certain rights such as voting on the future of the company.
- Bonds
Bonds are fixed-income securities that represent a loan from an investor to a company or government agency. Bond prices are more stable than stocks, bonds are used as diversification tools.
- Mutual Funds
Mutual funds are managed portfolios that typically hold dozens or hundreds of securities, such as stocks, bonds, or a combination of assets.
- Exchange-Traded Funds
Exchange-traded funds (ETFs) are investment securities that combine some of the attributes of stocks and mutual funds.
Long-term investing strategies often incorporate a buy-and-hold approach and focus primarily on achieving favorable rates of return over the holding period, while generally ignoring short-term market fluctuations.
As a rule, the more risk and less liquidity of your money, the bigger potential returns you would expect. For these reasons, it’s clear that timing really is the driving force behind how to handle your down payment money. Knowing how much down payment money you’ll need and when can help you make smarter and more profitable decisions with your savings.
At zoodpm, we assist rental property investors with the information and services you need to reach your financial and business goals. Contact us at 647-985-ZOOD (9663) for more information.