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The man on TV said if I gave him a few
hundred dollars I could buy real estate with ...
No Money Down
Questions & Answers about the TV ads
Lenders need to lend money. If you are a good credit risk, they usually want to lend as much of it as you will take, at an interest rate that makes them a profit of 4% or more over their cost of money. However, any lender you visit will tell you that they require 30% down on investment property. There are several reasons why, including government regulation, but the principal reason is to cover the costs of foreclosure and subsequent resale of the property in the event of default. Investors are not particularly loyal to a particular property and when things get tight landlords have been known to waltz away leaving lenders in the lurch.
Even so, there are as many ways to buy real estate with no money down as there are TV info-commercials wanting to sell you expensive books and tapes on how to do it. Most of the real estate get rich quick books, tapes, and seminars do have valuable ideas and the folks they present telling us stories about how they made $10,000 the very first day, may well be true. However, that claim is normally a paper profit and all it really means is that they believe they bought a property for $10,000 below what they think it is really worth. While the statement is true, . sort of ... what would they actually net if they had to sell the property the next day, after paying a 6 or 7% real estate commission, document preparation, title insurance, taxes and transfer costs?
What if the property they bought turned out to have serious lead, asbestos, mold or other problems that required many thousands of dollars to correct before it can be sold or even legally rented. There are numerous other "what ifs" that must be considered if one is to make a profit or even avoid serious problems. Those folks usually run out of TV time before they have a chance to fill you in on all the facts of life, but we have as much time as you have ... and we will continue to add up-dated data and ideas to this site almost every day.
Finally, have you not wondered why the people pushing "no money down" books, tapes, and seminars are spending their time doing so rather than out buying a lot of properties using their recommended techniques to make millions for themselves. Surely you didn't think that they were trying to help the "little guy" make a lot of money. The real answer is simple. They can make much more money selling their products to the unsuspecting public than from buying and selling properties themselves and do so with a lot less hassle and risk.
Sadly, only a very small minority of those who bought the books or tapes or attended the seminars will be successful over the long-term. Even more unfortunate will be the possible larger minority who will get themselves into serious financial trouble because they found themselves with unsustainable negative cash flows and ended up not only losing the "no money down" property in foreclosure, but also losing (1) lots of cash that they put into fixing it up and/or trying to save it, (2) their good credit rating, (3) even their total net worth.
While, it might seem that the last sentence above must be an exaggerated scenario, let me assure you that it is a possible result in the real world. Some of the staff at RHOL have seen a variety of such scenarios during their long real estate brokerage and/or investment careers and this is why we can provide you with information that will both show you how to avoid such problems and increase the your chances of being a successful investor. On this page, we show you example scenarios of how you may be able to purchase property with no money down. Some of the scenarios are covered further on separate pages where we also discuss some of the ways in which you can definitely get into trouble.
Although you can sometimes buy property for thousands below its value, and you can sometimes buy it with no money down, it is important to understand, that it does not necessarily mean that the seller doesn't receive any cash money at closing. Rather it means that there is little or no money out of your pocket to make the deal. We will show you some of the ways that you can do what they do on TV right here in these RHOL pages, but we also show you the dangers of getting too caught up in just the buying aspect of real estate investing. There is much more to the rental housing business than buying property below value with no money down. We want to help you do that
and end up with spendable cash in your pocket. not that of the guy on TV, your lawyer or a psychiatrist.
There are an infinite variety of ways in which a no money down purchase can be attempted. Some work sometimes, others work other times, and some don't really work anytime. Most no money down purchases actually utilize more than one technique. Below, we'll give brief descriptions of a number of scenarios.
Many property owners who want to have real estate to sell do not need a down payment. Perhaps they are planning to retire and just want a steady income from the property. Perhaps their life style has changed and they no longer have time to manage rental property. Perhaps they had a job transfer to another town. Also, the IRS provides potential tax benefits from selling on the installment plan. You can see the countless possibilities. However, they will all want to know that their income will be secure and that their security interest in the property is protected.
The principal of using you as the down payment is simple. "Mr. and Mrs. Seller, I will buy your $50,000 property on a $35,000 land contract or trust deed. However, I would also like you to loan me $15,000 on a personal loan for a short term. Here's why you should: I have a net worth of $X, and an income of $Y. Here is a copy of my credit report showing that I pay my bills on time. You have little risk with me as you can see, and the result of our arrangement will net you the most money, in the shortest amount of time, with the least amount of immediate income taxes due on your gain."
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Commercial banks make business loans to individuals every day for the purpose of buying inventory, equipment or countless other business reasons. Your rental housing business qualifies. Visit your local commercial banks and make friends with a loan officer. Set up a business loan account for the maximum amount they will allow as an unsecured loan.
Select a building to buy. Negotiate a low, low purchase price for CASH. Estimate how much money it will cost to repair and update the property. Go get the money and buy the property. Fix it up, then put a new long term mortgage on the property which will now be based on 70% of the appraised value, not your original purchase price. If you did a good job when you negotiated your purchase price and renovations, you may well be able to recover your entire investment with long term financing.
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Locate a property with a lot of the right things wrong with it. Then, skillfully negotiate a purchase price of about 70% of what the fair market value will be after you make the necessary corrections and improvements. Then convince the owner to give you a short term contract to purchase while you do the work. If that doesn't work, find someone else who will float a short term loan secured by the property. Secure long term financing based on the new market value.
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This is the most common method used by real estate investors to buy property with no new out of pocket money and create leverage. Perhaps the simplest and quickest approach is a real estate equity loan. Many lending institutions will offer to loan up to 75% of a property's assessed value for tax purposes, without requiring surveys, appraisals and closing costs. So if you own real estate valued at $100,000, with a mortgage balance of $50,000, you should be able to get an equity loan of $25,000. Use that $25,000 as the down-payment on one or more new properties.
The key, of course, is that the combined net operating income from the properties must service all of the combined debt.
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There are many possible scenarios wherein one or more partners put up the money, while another (you) finds the property to buy, negotiates the deal, screens the tenants and manages the investment. Partnerships often have a great deal more to offer than down payments too. Each individual may bring specialized information or an area of expertise to the project that is more valuable than money. Partnerships take many forms. The most popular have always been general partnerships or Limited Partnerships.
Many states have now authorized Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP) which offer the tax benefits of a sole proprietorship or general partnership, with the limited liability of a Limited Partnership or Corporation.
There are many issues that must be considered when forming "partnerships" no matter what the legal form of the entity. Included are form of entity, documentation, selecting group members, and securities laws. Many of these issues will be discussed on our soon-to-appear member-only Group Investing page.
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The below story comes from a real estate broker as told to one of our staff. The numbers will seem low because it was quite a few years ago. See if you can spot several questionable issues regarding this particular transaction. We will provide a month extension of your membership for each item found. Send your answer to Ralph@cses.com.
"Several years ago a young man, Don, came into a my real estate office and told me that he had watched a TV program that said he could buy rental property with no money down. The program also said that there were very few brokers who knew how, but that he should ask around until he found one.
"Normally, I was unwilling to invest the time and effort necessary to construct such a purchase for a novice buyer because of the relatively small amount of money I would earn for my efforts, whereas I could do the same deal for myself and keep all the money. However, I liked Don right off and decided to take up the challenge on his behalf. Besides I wanted to show off and show up that TV guy who said that few brokers knew how to do what he did.
"I had a two family home listed for sale at $48,500. The owners had been living in one side and renting out the other. The net operating income from the property would likely be about $500 per month when both sides were rented.
"The sellers had an opportunity to purchase a home out in the country next to her parents, so they needed enough cash out of their present home for a down payment on the new one.
"We wrote an offer to purchase of $50,000 subject to Mr. Harris getting a 70% mortgage from a local Savings and Loan ($35,000). We asked the sellers to give the buyer a $4,000 re-decorating and updating allowance at closing and to pay his closing costs of about $1,100. We also asked the sellers to eventually loan Don $11,500, secured by a second mortgage on the property.
"You will note that we have arranged financing of $51,500 to purchase a $48,500 property for $44,900 plus the $1,100 closing costs. (92.6% of their asking price)
"Bank regulations do not allow purchasers to borrow their down payment so we had to find a way for Don to come up with a temporary $11,000 to take to the bank closing. He had $5,000 (ignoring vacancy and operating expenses), I bought his motorcycle (temporarily) for $2,000 and his parents gave him a (temporary) gift of $4,000.
"My sellers received the $35,000 from the bank at closing, less my 7% commission, they netted $31,500 cash. More than enough for their down payment on the new home. They also had a second mortgage in the amount of $11,500 at 11% interest over 15 years giving them an income of $131 per month to help make the payment on their new mortgage. They were very happy.
"Don owned his first income producing property that had an NOI of about $500 per month, less payments of $294 to the bank and $131 to the sellers, so he initially netted $75 per month. He also had $400 cash left over at closing to put in his pocket for his trouble. Don has purchased eleven additional properties through me since that first one. He is happy and doing well.
"The sellers were winners, the buyer was a winner, and the bank was a winner. I was paid $3,500, plus I earned a commission on the home that the sellers bought. But most |