No Money Down, No Down Payment
Brought to you by IntelliBiz.com
Menu:
Many "gurus" will say you can buy all kinds of real estate for no money down,
that you can own all kinds of income properties with no down payment.
Well, to a degree that is all true.
No money down investing is not only
possible, but easy. Falling off a cliff
is easy, too, but I would not recommend it as a quick way to get off a
mountain. Like any other endeavor, real estate investing requires the use of
common sense. If you follow a sound plan and
have a good mentor to help, you can get off that mountain quickly,
but also in one piece!
There are two major methods of investing - buy and hold (income
properties) and
"flipping"
(buy and resell, either immediately or after fixing).
When you flip, buying with no money down is the best way to go - it preserves
your cash for other things, and since you will be reselling,
it does not matter if the mortgage payment is going to be a little higher
while you own it. If
you are flipping by using the double escrow, or by assigning, you will not be getting
a mortgage, anyway, because you won't be holding it at all. So, a no down
payment deal is great when flipping.
But if you buy a property with the intention of holding onto it
for income, a
"no down payment" deal can put you into bankruptcy fast!
This is because a no money down purchase
results in a higher monthly mortgage payment (and adds the cost of PMI -
Private Mortgage Insurance),
which in turn reduces the net income - often to the point of creating a
negative cash flow. Even if the cash flow is positive, it can become
negative quickly if you have a vacancy for a couple of months!
FACT: the monthly mortgage expense on a nothing down
deal, compared to putting the standard 20% down, is a whopping 45% higher!
Ask any investor who owns income property just how fast he would go bankrupt
if his mortgage expense were to increase by 45%.
We will tell you what the other "gurus" won't - use
"no money down" strategies only if flipping, or if you are
getting such a great bargain that even 100% financing will not wipe out the
positive cash flow. If you get a property at a 20% discount, that is the same as if you
made a 20% down payment.
If you are a bit low on cash and/or credit, you
can simply use the "no down payment" flipping strategies to build up your cash
reserves. Once you have reserves, begin buying up income properties,
using some of that cash to insure a good positive cash flow by putting up a good down payment.
The better methods of flipping real estate are (see other links on home page for details):
Other "no money down" deals can occur when the seller can be convinced
to "carry" a second mortgage (seller financing of part of his equity). In short,
the seller allows the
buyer to "borrow" some of his equity. For example, let's say the seller has a
place worth $200,000. Of that,
$100,000 is mortgaged, and he has $100,000 in equity. Buyer can only qualify for
$150,000. To sell quickly (or in a buyer's market), the seller
decides to "loan" the buyer $50,000 of the his equity. In other words, the buyer would owe a first mortgage of $150,000
to his lender, and would owe a $50,000 second mortgage to the seller. At closing, the buyer's lender puts up
the $150,000. Of that, $100,000 goes to paying off the seller's mortgage, and the remaining $50,000
goes to the seller. The seller also gets a note (second mortgage) from the buyer worth $50,000.
In other cases, perhaps the seller will accept a deferred down payment.
Same property as above, but the buyer does not have the 10%
down payment his lender requires. So, seller allows the buyer to "owe" him
that 10%. Buyer would pay $180,000 at closing,
and agrees to pay the remaining $20,000 to the seller in, say, 5 years, at
which time buyer
refinances to pull out his appreciation, and pays off the seller. This is
risky - you may not be able to
come up with the cash when required.
Equity participation is another way to get into a property with no money down.
In this case, the seller leaves 10% of his equity in the property, which is
used as the down payment, and he then becomes a "silent partner" in the property. In 5 years, the
property is either refinanced or sold, to pay off the seller and buy him out.
If the seller is not interested
in doing an equity participation deal, an outside investor could become that
partner - he puts up the down payment,
and gets the tax benefits and half of any appreciation. You then buy
him out in 5 years or so.
The triple-net lease (nnn) has gotten a lot of investors into a
multi-unit with no down payment.
Basically, you find a landlord who is sick of landlording, but can't
afford to give up the income.
You offer to take over the building, and pay him "X" dollars a month from
the income - about 80-90% of
the NET income goes to the seller. You keep the balance for doing the work.
But in an "nnn", you have full responsibility,
allowing you to do things that would increase the rents, and decrease the
costs. If fix-ups can result in a 10% rent increase, and you cut operating costs by 10%,
you have just
increased your share of the profit by a considerable amount. Add a coin
laundry in the basement or snack & soda machines in the lobby for more profit.
If your triple-net lease includes an option to buy, all the better - the building
is appreciating, but your purchase price is not. Rents may go up during the option period, as well.
As you can see, there are instances where "no money down" makes perfect
sense - and other cases where no down payment
will lead you to bankruptcy. Knowing the difference will help insure your
ultimate success.
"The Simple Man's Guide to Real Estate" details all the various methods of buying with
no money down, and provides the necessary agreements and free mentoring. Check it out - you'll be glad you did.
Simple Man's Guide®is a registered trademark of IntelliBiz.
No Down Payment, No Money Down page copyright 2008