No Money Real Estate Investing – Part Two
When people ask me how to find money for their real estate deals, they often aren't happy with my answer. Looking for easy solutions that don't require any work or sacrifice on their part, many people turn away disappointed from my advice.
But when I am asked:
- "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."
- "I hear a lot about using credit cards, home equity line or owner financing for a down payment on a new investment property. What is a realistic time line to see a positive return on investment (ROI) to reimburse funds?"
- "How can I do what Robert Allen does- you know, those "no money down, cash back on closing" deals?"
My best advice for someone who wants to get started in real estate investing is to track income and expenses every month- the goal is to see whether you are spending more or less than what you make. Once you've figured that out, you should adjust your lifestyle so that you are spending less than you make and any excess money should be used to pay down your debt and start saving money for your first real estate purchase.
The one piece of advice I give universally is that you should NOT use your credit card to finance your real estate investment - EVER. No matter what the end game is, there is far too much risk involved with that.
Credit cards can charge 18% or more interest. That's a lot more than any bank. What if you borrowed $20,000 on your credit card and that great investment turned out to be not so great? Do you really want to pay 18% interest on the $20,000 now due? Do you know how long paying that off would take?
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 a great way to find the extra money. Vendors are often happy to provide this as these types of loans are secured against the property itself and gives them a steady stream of income in their pocket every month. But before you go into this type of situation, you have to make sure that the vendor is willing to do it, and that you can handle the extra payments. This method shouldn't be used, however, if you can only get 75% bank financing and have no down payment.
Take it from us, however- buying properties with no money down does not mean it won't cost you in other ways! We've learned from experience.
No money down investing is much riskier than making a down payment without using your own money.
Let me explain... no money down is where you borrow 100% of the cost of the property. It's incredibly risky because if the value decreases even by 5%, you will find yourself owing more money on the property than it's worth. And if anything goes wrong you will find yourself pinched to pay for it. There are a lot of foreclosures happening all around North America for this very reason!!!
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. Evaluate the equity of the home that you already own. If you're still several years away from retirement and your home has equity, then consider using a small part of that equity (about 25%) to finance the purchase of your first investment 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.
Trust us, between the two of 'no money down' and finding a partner, finding a partner is a much better way to purchase a property. We've done deals with no money down, and they've always ended in disaster. But on those occasions when we've found a good partner, those deals have all been huge successes. When you have a partner, they bring money for the down payment to the table; and what you bring to the table is the research and the promise to do the work involved with overseeing the property. Working with a partner enables you to buy good properties in good neighborhoods instead of wrecks in bad neighborhoods. This also gives you equity right from the beginning and lowers mortgage payments. When the property needs repair and the rental income won't cover it, costs of the repair are divided with the partner 50-50. Ownership between us and the partner is also 50-50.
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!
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