No Money Real Estate Investing - Part Two
I'm often asked to provide advice to people regarding how they can get the funding for their real estate deals, and they are sometimes disappointed with my advice. That's because a lot of people are looking for easy solutions that require very minimal effort or sacrifice on their part.
But, when I get questions like:
- "Should I approach other investors for partnering when I have no money for startup? I feel like I will be swallowed by sharks, even though they all seem nice enough. I have seen several potential properties and I need to make the big leap to action."
- "Would you suggest I use owner financing, home equity line or credit cards for a down payment on a new investment property? And if so, what is the time line to see a positive return on investment to reimburse funds?"
- "How can I do deals like Robert Allen - no money down, cash back on closing?"
I tell people to start by tracking their monthly income and expenses to see whether they spend more or less than what they earn each month. If they are spending more, lifestyle adjustments need to be made, and if they are spending less, the excess should be applied toward paying down debt and saving for real estate investments.
I always tell people where not to find money for their down payment: credit cards. Never ever look to your credit card to finance any real estate or any other investment. It's much too risky.
What if something goes wrong with your investment and you end up paying 18% interest on that $5,000, $10,000 or $20,000 you borrowed from your credit card for years to come? Do you want me to do the math on that?
Some people turn to the equity in their homes. This can be good or bad depending on your situation. For example, if you're about ready to retire or are over 65, then this could be a bad idea. On the other hand, if your home has about $200,000 worth of equity and you're younger than 50, it could be an excellent choice- as long as you think you can handle the extra payments if something were to go wrong with your investment.
Properties that are 'good deals' are properties that pay for the extra payments that a $50,000 home equity loan will result in as well as the monthly expenses for the property itself. That's what makes using home equity a good way to finance an investment property.
Owner financing (or vendor take back financing) is one of my favorite methods to use when buying property. It's a win-win situation- you win because you can proceed with the purchase and the owner wins because he/she gets a loan payment from you every month and the loan is secured against the house. However, if a bank will only finance 75% of the purchase and you have no down payment, owner financing is not what you should use to finance the rest.
We've bought properties for no money down. We've learned the hard way that no money down does not mean it won't cost you!
No money down investing is much riskier than making a down payment without using your own money.
What makes no money down so risky? Well, for starters, you would have to borrow 100% of the value of the property. That means if property values drop, even by as little as 5%, you'll owe more money than it's worth. And you probably won't be able to afford it, which will result in foreclosure. This sort of thing has been happening frequently in North America lately.
If you purchase a property with 100% financing, the odds are very low that it will make enough to generate cash flow. Then there are also the miscellaneous fees involved with buying a property, such as fees paid to lawyers, inspectors, property taxes, etc. These miscellaneous fees normally amount to 2-3% of the purchase price of the property.
Therefore, the risk to no money down deals is very high because you would have no equity in the property and would not be making much income from the property due to the high monthly payments. If you've found the perfect property to invest in but have no money for a down payment, then there are some things you should try:
1. Start controlling your destiny by controlling your money. Get out of debt and start saving. You don't necessarily need a lot of money, but no one will want to partner with a person who can't handle their own finances.
2. Look to your home. If you own a home and have some years left before you were planning on retiring and have a reasonable amount of equity in your home (over 25%), consider using a portion of the equity in your home to get started with investing in another property.
3. If you rent or don't have any home equity, then you need to do some research to find a great property that could be purchased with as little as 10% down. In this case, a great property is defined as one where the rent will pay for the expenses of the property. Once you find it, you need to get a partner with money to invest and no time to do research of his own. This requires you to sell yourself as well as the property.
We've bought several properties when we've had very little money ourselves. The no money down deals blew up in our faces. Those were hard lessons learned. But, the deals we did with a partner, where we did all of the work finding and purchasing the property, and now oversee the property, have been a great success. Having money for a down payment allows us to buy better properties in better areas, gives us equity in the property from the start, and helps reduce the monthly mortgage costs so the property is more likely to provide cash flow from day one. The deal we typically make with partners is this: Our partner puts down the money for the down payment, but we jointly own the property 50-50. If we have to make major repairs, and the income from the property can't cover it, we split the cost evenly.
When we sell, our partner will get his down payment back first, then we split the rest of the proceeds. Maybe we gave up some equity to get the deal done but we also substantially reduced our risk! - 23310
But, when I get questions like:
- "Should I approach other investors for partnering when I have no money for startup? I feel like I will be swallowed by sharks, even though they all seem nice enough. I have seen several potential properties and I need to make the big leap to action."
- "Would you suggest I use owner financing, home equity line or credit cards for a down payment on a new investment property? And if so, what is the time line to see a positive return on investment to reimburse funds?"
- "How can I do deals like Robert Allen - no money down, cash back on closing?"
I tell people to start by tracking their monthly income and expenses to see whether they spend more or less than what they earn each month. If they are spending more, lifestyle adjustments need to be made, and if they are spending less, the excess should be applied toward paying down debt and saving for real estate investments.
I always tell people where not to find money for their down payment: credit cards. Never ever look to your credit card to finance any real estate or any other investment. It's much too risky.
What if something goes wrong with your investment and you end up paying 18% interest on that $5,000, $10,000 or $20,000 you borrowed from your credit card for years to come? Do you want me to do the math on that?
Some people turn to the equity in their homes. This can be good or bad depending on your situation. For example, if you're about ready to retire or are over 65, then this could be a bad idea. On the other hand, if your home has about $200,000 worth of equity and you're younger than 50, it could be an excellent choice- as long as you think you can handle the extra payments if something were to go wrong with your investment.
Properties that are 'good deals' are properties that pay for the extra payments that a $50,000 home equity loan will result in as well as the monthly expenses for the property itself. That's what makes using home equity a good way to finance an investment property.
Owner financing (or vendor take back financing) is one of my favorite methods to use when buying property. It's a win-win situation- you win because you can proceed with the purchase and the owner wins because he/she gets a loan payment from you every month and the loan is secured against the house. However, if a bank will only finance 75% of the purchase and you have no down payment, owner financing is not what you should use to finance the rest.
We've bought properties for no money down. We've learned the hard way that no money down does not mean it won't cost you!
No money down investing is much riskier than making a down payment without using your own money.
What makes no money down so risky? Well, for starters, you would have to borrow 100% of the value of the property. That means if property values drop, even by as little as 5%, you'll owe more money than it's worth. And you probably won't be able to afford it, which will result in foreclosure. This sort of thing has been happening frequently in North America lately.
If you purchase a property with 100% financing, the odds are very low that it will make enough to generate cash flow. Then there are also the miscellaneous fees involved with buying a property, such as fees paid to lawyers, inspectors, property taxes, etc. These miscellaneous fees normally amount to 2-3% of the purchase price of the property.
Therefore, the risk to no money down deals is very high because you would have no equity in the property and would not be making much income from the property due to the high monthly payments. If you've found the perfect property to invest in but have no money for a down payment, then there are some things you should try:
1. Start controlling your destiny by controlling your money. Get out of debt and start saving. You don't necessarily need a lot of money, but no one will want to partner with a person who can't handle their own finances.
2. Look to your home. If you own a home and have some years left before you were planning on retiring and have a reasonable amount of equity in your home (over 25%), consider using a portion of the equity in your home to get started with investing in another property.
3. If you rent or don't have any home equity, then you need to do some research to find a great property that could be purchased with as little as 10% down. In this case, a great property is defined as one where the rent will pay for the expenses of the property. Once you find it, you need to get a partner with money to invest and no time to do research of his own. This requires you to sell yourself as well as the property.
We've bought several properties when we've had very little money ourselves. The no money down deals blew up in our faces. Those were hard lessons learned. But, the deals we did with a partner, where we did all of the work finding and purchasing the property, and now oversee the property, have been a great success. Having money for a down payment allows us to buy better properties in better areas, gives us equity in the property from the start, and helps reduce the monthly mortgage costs so the property is more likely to provide cash flow from day one. The deal we typically make with partners is this: Our partner puts down the money for the down payment, but we jointly own the property 50-50. If we have to make major repairs, and the income from the property can't cover it, we split the cost evenly.
When we sell, our partner will get his down payment back first, then we split the rest of the proceeds. Maybe we gave up some equity to get the deal done but we also substantially reduced our risk! - 23310
About the Author:
Learn How to Retire with rental property with Daves free rental property Investing Starter Tips Guide. Learn how to find money for rental property deals, create financial freedom, positive cash flow and massive wealth with tips like: How to find quality rental properties, finding and keeping great tenants, and easy ways to make more money with rental property.
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