7 Tips for Renters to Save for a Down Payment on a House

 
More people are renting than buying today compared to historical trends, but most renters eventually want to buy a home.

If you are currently a renter but are looking to eventually buy a home, you need to save for a down payment. Depending on your cash flow, this can potentially take a long time.

But the good news is you are reading this! I’m going to walk you through seven tips for renters who are looking to save for a down payment on a house.

We’ll cover a lot of ground in these seven tips, and if you cover off on all of them you will put yourself in a great spot financially when you purchase your first home.

First I want to share a little about my own experience. Close to seven years ago my wife and I bought a fixer-upper. I learned a lot through the process (I highlight everything in this post if you want to read about it).

Some of the lessons I learned will influence the seven tips I share, but a big one was you really can’t save too much because everything is more expensive than you expect, and expensive unexpected repairs can and will happen.

Saving for a down payment is easier said than done, so I like to start at the source: cash flow.

1) Understand Your Cash Flow

 
A down payment requires socking away cash (the more the better) over a long period of time. A positive cash flow that can be diverted towards your down payment fund is essential.

There is no way of avoiding this: to understand your cash flow, you need to track your income and expenses.

I personally don’t budget and haven’t kept a budget for years. Instead I simply track my income and expenses. I’ve already created a positive cash flow, so as long as I don’t experience (too much) lifestyle inflation I will continue to be see money going into my retirement and Health Savings Account.

In a similar way, you want to be aware what your general cash flow is and how much you can realistically siphon off into a down payment fund each month. Is it $100? $500? $1,000? This will have a big impact on how long it takes you to build up a big enough down payment to purchase a house.

First things first: track your income and expenses. You can do a backwards look on your past few months of bank and credit card transactions using an automation tool like Tiller, which is the service I use.

2) Look for Ways to Increase Your Cash Flow

 
The more money you can put in your down payment fund each month the faster you can purchase a home. When you run the numbers of how much you can set aside each month and convert that to how much you can save in a year, you may be motivated to increase your cash flow (I was).

There’s two ways to increase your cash flow: make more money or cut expenses.

My wife and I are both in our thirties now, but we got married in our early twenties. We’ve tried a wide variety of things to increase our income and to cut expenses.

We’ll start with making more money. You can either do this by maximizing your 9-5 income or starting a side hustle.

At the time of this writing labor market is tight, so it makes sense to evaluate your current position and see if a raise makes sense. Alternatively, most people get a nice pay bump when they leave their current employer for an external opportunity.

But let’s assume you are maxed out at your job from an income perspective or that you are content with where you are at. You can always make money through side hustles. I have 50+ online and at-home side hustles listed here that can help you start brainstorming the right side hustle for you.

Cutting expenses can only go so far, but its an important thing to take a look at. There’s a reason why companies and businesses spend so much time and energy looking at their costs – there’s always more that can be cut. My suggestion here is to focus on your priorities. If you care about renting a nice apartment that you can come home to, then cut expenses elsewhere. If you love travelling and refuse to cut spending there, perhaps you should live in an apartment that’s a bit older but cheaper.

As far as ideas to cut expenses, go to this post and scroll down to the save money section (it starts at #23) to help you brainstorm ideas.

3) Get Rid of Credit Card Debt

 
Sometimes saving for a down payment for a house has to come secondary to other financial goals. Getting rid of credit card debt is one of those goals.

Credit card debt is at a high interest, and that interest is eating into your cash flow. You need that cash flow to save for your down payment, not to mention other goals like investing and building a retirement account.

It can be a bit depressing to realize you need to first tackle a beast like credit card debt before taking on another difficult goal, namely saving for a down payment. The general concept is the same, though: increase cash flow as much as you can, and divert that cash flow towards your credit card debt. Rinse and repeat.

If you feel in over your head with credit card debt, please reach out to a member agency of the National Foundation for Credit Counseling, or my friend Leslie Tayne, who is a debt lawyer who meets 1:1 with each individual who is seeking help and/or more information on their options.

4) Save, Save, Save

 
This is kind of a “duh” tip, but saving is clearly at the core of being able to afford to buy a house.

There are many examples where renters are paying more on rent than they would be on a mortgage, or a mortgage would be comparable to their rent. The biggest thing holding most people back is that big down payment they have to save for.

This is exactly why I started the post by talking about some of the proactive things you can do to get a good understanding of your cash flow. Once you’ve eliminated high interest credit card and other debt and start diverting positive cash flow towards a down payment fund, it’s just a matter of time before you have a down payment for your house.

As I discuss in my post 10+ things I learned from purchasing a fixer-upper, the more cash you have the better. Our basement flooded the first summer and our sewer drain-out collapsed the second Winter (why us?). Stuff breaks and emergencies happen where you need to make repairs. Not only do you need a down payment to purchase a home, I do think a healthy emergency fund (at least three months of expenses to start) is necessary as well. Once you have a home you are opened up to more risk and potential demands on your wallet. Having that money set aside will make those situations a lot less stressful.

With that I’ll get off my soap box and talk about a related topic: where to park all that cash.

In theory you could put some of your down payment funds in the stock market. After all, if you have an emergency fund plus down payment fund, you realistically could end up with tens of thousands in cash sitting in accounts that could be exposed to the stock market. The problem with putting it in the stock market, though, is that the market could have a downswing and we have no idea how long that will last. The choice is up to you, of course, and you’ll have to weigh your risk tolerance.

Within the past year I ditched my bank’s savings account (which was paying me something like 0.01%) and parked our emergency fund in CIT Bank’s High-Yield Savings Account. This account gives you 2.30% APY, which is one of the highest in the industry. You can read my review here or check out the details on CIT Bank’s website. Like I said, I’ve personally switched to CIT Bank and get $500+ more a year in interest than I was getting at my home bank.

5) Improve Your Credit Score

 
While the interest rate that the Federal Reserve sets will play a big role in what interest rate you get on your mortgage (baby boomers love to talk about their 10%+ mortgages and how it was standard “back in the day”), your credit score will also play a role. If you have excellent credit you will be able to get the lowest rates possible. If you have average credit you will get worse rates.

Unless you refinance, which can be a hassle and costs money, the interest rate you get on your mortgage will stay with you for years. With that in mind, it makes sense to improve your credit score as much as possible.

Here are the five areas that impact your credit score:

• 35% Payment History

• 30% Amount Owed

• 15% Length of Credit History

• 10% New Credit Applications

• 10% Types of Credit

On-time payments are very important when it comes to credit scores. Lenders do not want to see missed payments. As I explained earlier, before savings for a down payment your first goal should be to knock out credit card debt. Whether you accomplish this by cutting expenses, increasing income, or just leveraging your current cash flow, you’ll want to get this debt off your books as soon as possible.

Once you are out of credit card debt, or if you never had credit card debt, you should be paying off the account in full every month. I also generally don’t recommend closing credit cards (unless you have a bunch with annual fees), because once you close a card you won’t have that credit history or access to credit to help give your score a boost.

Finally, amount owed is another big factor. Said differently, that means your credit utilization. If you charge $1,000 to a credit card but have access to $100,000 of credit across all your credit cards, your credit utilization is a rock-bottom 1%. Even if your credit limit is low (sometimes you have to start with a limit as low as $500), keep your utilization below 30% at all times.

Don’t have a credit card or haven’t opened one in a long time? Unless you had issues with credit card debt in the past, it can really help build your credit. Here’s some cash back cards I recommend, which are great for everyday purchases.

Bottom line: focus on improving your credit score if you ever plan on taking out a mortgage.

6) Use Your Future Home as Motivation

 
We’ve gone over a lot already, and it can all be overwhelming. Which brings me to this tip: use your future home as motivation.

A more negative take on this would be: use your disdain for renting as motivation.

Like any huge personal finance goal that will take time, saving for a down payment on a house can be a slog. Remind yourself often about the reward for all your hard work: your own home!

I could go on for days about renting vs. buying, but the fact you are reading this means you are at minimum a little interested in potentially saving for a down payment on a home. Funnel that motivation into taking the actions you need to make it a reality, starting with understanding your cash flow by analyzing your income and expenses.

You can do this!

7) Think NOW About Potential Future Scenarios

 
I may not have worded that the best, but my point here is to try as much as you can to think a few years down the road BEFORE you buy a home.

I freely admit my wife and I jumped into home ownership quickly. In reality, it would have benefited us to save more money and have a bigger cash reserve, especially considering the fact we were buying a fixer-upper. I’m not sure we would have had the cash necessary to get our home into “rental shape” if we had to move for a job or grad school, which was always our fallback option if life presented opportunities out of state. We could have sold if we needed to, but given the short time between buying and selling we probably wouldn’t have recouped all the costs that went into the process.

Also think about your lifestyle. I ended up writing my first book while working full-time…and while building a 40-foot retaining wall in my backyard. Because my side hustles became more time-consuming, it has been more difficult to work on our fixer-upper than I anticipated. But looking back, it was a definite possibility that opportunities could come up, and I had no plans of leaving my 9-5.

Focus on the first 3-5 years that you will be in your home. What sort of time can you put towards home maintenance, renovations, and upkeep? If you had to move on a dime to take advantage of an opportunity, would the house be in shape for rental (if this is a desired path for you) or would you be forced to sell because you are short on cash?

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That was a LOT to think about, but I hope these tips were useful for you as you look to eventually move on from renting.

My last request? Keep me in mind when you are inviting people to your housewarming party! :D

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