No Money Real Estate Investing - Part Two
People often ask me how they should obtain the money for their real estate investments and are sometimes not happy with my response. That's because many are hoping to find easy solutions that don't require much work on their part and are therefore disappointed with my advice.
But, when I get questions like:
- "Should I find other investors to partner with if I have no money of my own? This seems like a daunting task and I'm not sure how to go about it. But, I really want to get started investing in real estate as I've recently seen several nice investment properties."
- "I've heard that you can use credit cards, owner financing or a home equity line for a down payment. Is this a good idea, and how soon could I expect to see a positive ROI (return on investment) to reimburse funds?"
- "How can I do deals like Robert Allen - no money down, cash back on closing?"
I usually start by telling people to begin by tracking their own expenses. Make sure you spend less than you make. And, make sure you are doing that each and every month. Then, use the excess to pay down your debt or save for your 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?
As for the other methods - using home equity and vendor take back financing - it really depends on your goals and where you are right now in your life. If you're 65 and getting ready to retire, I am not sure I would use the equity in your home. But if you are under 50 and have $200,000 equity in your home, I would definitely consider a $50,000 home equity loan for a down payment on a real estate investment - assuming you can cover the extra payments if something goes wrong with your investment.
On a good deal, your rental income should pay for the monthly payment increase that the additional $50,000 that the home equity loan will cost you, along with all of the other expenses on the rental property. In this case, I think that it's a great source of money to use for a down payment on your first 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.
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 real estate investing is VERY different than buying a property without using any of your own money for a down payment.
No money down deals are unbelievably risky because you borrow 100% of the price of the property. Sure, this may sound good, but if the market drops even by as little as 5%, you're going to wind up owing more than the house is worth. Are you going to be able to find money to pay for it? Many families across North America are going through this right now.
It's also extremely difficult to find a property that will cashflow with 100% financing. And you would still need money to cover the closing costs on your purchase- typically you can expect to need about 2-3% of your purchase price for a property inspector, a lawyer, property purchase taxes and a few other disbursements depending on where you are buying.
No money down deals are not only MUCH riskier because you have no equity in the property, they are also pretty hard to find because they rarely cashflow. If you have no money for a down payment on your real estate investment, then, in the following order, this is what I suggest:
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. If you have over 25% equity in your existing home and many more years before you were planning to retire, think about using part of that equity to get started in real estate investing.
3. Have no money and you are currently a renter or don't have enough equity in your home? Find a great property - one where the rent will cover the costs with as little as 10% down. Get an accepted offer and then find a partner that has the money to invest in the property with you. Be prepared to sell yourself AND the property.
Over the years, we've bought many properties with very little of our own money. We've tried the no money down deals and never had one work out successfully. However, we have had success when working with partners when we did all of the work involved with finding, purchasing and overseeing the property. Since the partner provided the down payment, it allowed us to get a better house in a better location for which we could charge higher rent than if we had bought a lesser house in a lesser neighborhood. It also meant that we had equity in the property from the very beginning. The deal with the partner is outlined prior to purchase- even though the partner provides the down payment, we jointly own the property (we each own 50%). If repairs to the property are required, any costs that can't be covered by the rental income are paid for 50-50 by us and the partner.
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! - 23159
But, when I get questions like:
- "Should I find other investors to partner with if I have no money of my own? This seems like a daunting task and I'm not sure how to go about it. But, I really want to get started investing in real estate as I've recently seen several nice investment properties."
- "I've heard that you can use credit cards, owner financing or a home equity line for a down payment. Is this a good idea, and how soon could I expect to see a positive ROI (return on investment) to reimburse funds?"
- "How can I do deals like Robert Allen - no money down, cash back on closing?"
I usually start by telling people to begin by tracking their own expenses. Make sure you spend less than you make. And, make sure you are doing that each and every month. Then, use the excess to pay down your debt or save for your 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?
As for the other methods - using home equity and vendor take back financing - it really depends on your goals and where you are right now in your life. If you're 65 and getting ready to retire, I am not sure I would use the equity in your home. But if you are under 50 and have $200,000 equity in your home, I would definitely consider a $50,000 home equity loan for a down payment on a real estate investment - assuming you can cover the extra payments if something goes wrong with your investment.
On a good deal, your rental income should pay for the monthly payment increase that the additional $50,000 that the home equity loan will cost you, along with all of the other expenses on the rental property. In this case, I think that it's a great source of money to use for a down payment on your first 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.
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 real estate investing is VERY different than buying a property without using any of your own money for a down payment.
No money down deals are unbelievably risky because you borrow 100% of the price of the property. Sure, this may sound good, but if the market drops even by as little as 5%, you're going to wind up owing more than the house is worth. Are you going to be able to find money to pay for it? Many families across North America are going through this right now.
It's also extremely difficult to find a property that will cashflow with 100% financing. And you would still need money to cover the closing costs on your purchase- typically you can expect to need about 2-3% of your purchase price for a property inspector, a lawyer, property purchase taxes and a few other disbursements depending on where you are buying.
No money down deals are not only MUCH riskier because you have no equity in the property, they are also pretty hard to find because they rarely cashflow. If you have no money for a down payment on your real estate investment, then, in the following order, this is what I suggest:
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. If you have over 25% equity in your existing home and many more years before you were planning to retire, think about using part of that equity to get started in real estate investing.
3. Have no money and you are currently a renter or don't have enough equity in your home? Find a great property - one where the rent will cover the costs with as little as 10% down. Get an accepted offer and then find a partner that has the money to invest in the property with you. Be prepared to sell yourself AND the property.
Over the years, we've bought many properties with very little of our own money. We've tried the no money down deals and never had one work out successfully. However, we have had success when working with partners when we did all of the work involved with finding, purchasing and overseeing the property. Since the partner provided the down payment, it allowed us to get a better house in a better location for which we could charge higher rent than if we had bought a lesser house in a lesser neighborhood. It also meant that we had equity in the property from the very beginning. The deal with the partner is outlined prior to purchase- even though the partner provides the down payment, we jointly own the property (we each own 50%). If repairs to the property are required, any costs that can't be covered by the rental income are paid for 50-50 by us and the partner.
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! - 23159
About the Author:
Learn How to Retire with investment property with Daves free investment property Investing Starter Tips Guide. Learn how to find money for investment 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 investment property.
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