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Buying Investment Property For No Money Down

Myth or reality?

Ah, if it were only that simple…the most often-asked question in property investing has to be: can you actually purchase investment real estate for no money down? Well, I certainly have not. Nor have I heard of any other investor I know doing so. That said, in theory, there are ways to limit your own financial exposure in any investment property acquisition. Just don’t expect to find a situation where you can buy property completely for no money down. Investors tend to get pretty scared when they see you have no proverbial skin in the game. And then they either run away, or jump ship.

OPM made simple

Using other people’s money (OPM) is a tried-and-true formula many experienced investors have honed to a fine craft. Some ways of doing so involve seeking out owner-financing for a piece of investment property that’s on the market for sale, asking for greater loan to value ratios from your lender, asking for relatives and friends for unsecured loans for any given project, and partnerships (also known as joint ventures) where your partners take on partial ownership responsibilities with you (though not necessarily project control, or even any hands-on participation in the process).

Owner-financing

This is where most investors will begin in their efforts to reduce the amount of money they actually invest in any given piece of investment real estate. Finding a “desperate” seller is a good way to locate investment property where you can have the seller take back a large amount of the financing in paper supplied by them. The mortgage may be for a short-term, but if you work out a long-term amortization schedule (say, 30 years), your cash flow will be greatly improved. Most short-term mortgages given by sellers tend to be in the 3 to 5 year range. Afterwards, you can look to convert the mortgage to a standard one with your usual bank/lender that you have a relationship with already.

Also, keep in mind that sellers don’t necessarily have to be desperate to give owner-financing. If you “give” in price a little bit off of your negotiated amount, and pay a little extra, you may find that a seller is willing to offer paper in return for the increased price. Paper they had no intention originally of giving…

Greater LTV’s

Another option to lessen your actual cash outlay is to ask your lender for a slightly greater loan-to-value ratio for any given investment property. Most times a lender’s standards for investment property may be a top LTV of 70%. But if you shop lenders, you may find you can do a little better. In addition, consider buying a property where you become an owner-occupant. So, for example, if you purchase a three-family house, you can live in one unit and rent out the other two. In this scenario, since the property is also your home, you can apply for a mortgage under owner-occupied LTV ratios – which can be much greater than 70%.

Unsecured loans from family and friends

If you’re comfortable with this arrangement, consider borrowing funds for down payments and/or repairs and renovation from your family and/or close friends. You can download any number of promissory note blank forms online, see which makes the most sense for you, then ask your family member or friend to sign with you. The note will usually be for a specified amount of time, with a set rate of interest, with both principal and interest due at the end of the term.

If you give your relative or friend several points above what they could get from a bank, both you and they will be quite happy with the arrangement. Let’s say you offer them an interest rate of 5% on their unsecured loan. They’ll be happy receiving such a high return, and you’ll be ecstatic obtaining an unsecured loan at such a low percentage. A good deal for both parties. Keep in mind that you rather obviously better not default on your payout of the principal and interest – or Thanksgivings could become pretty icky in the future. So make sure you know your relatives and friends well enough to not mess with them in any financial sense. This rather obviously involves the utmost trust on both your parts. So make sure you know yourself and your relatives or friends very well before undertaking this scenario.

Partnerships

Lastly, consider partnerships (or joint ventures) with other investors. Some may not want the headache of being responsible for al the work that’s required once you’ve purchased the property. Some don’t want to be property managers. Others don’t want to do property renovation work. So they let you handle it – in return for a share of the operating and future sale profits, since they will become part-owners with you.

Counting the ways

All these ways of financing investment property are designed to lessen your overall cash outlays in any given project. You can use one or several of these techniques to help you keep you overall exposure down. Will you be able to totally pay for an investment property with no money down? Not very likely. But you can lower your total cash cost – and in so doing, lessen your own risk, as well as substantially increase your return on investment (ROI). Obviously, the smaller your own cash amount invested in a property, the greater your leverage – and the greater your ability to reap larger ROI’s on your minimal cash investment.

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Quick Property Investment Tips

Advice for the beginner investor

Novice property investors should be cognizant of these quick and simple property investment tips. They will keep you pointed in the right direction. Always refer back to them when you hit a snag in the process… (It also makes sense to try to memorize them, and recall them as you begin searching for new investments to acquire.) In this way, you too, can become a savvy, experienced property investor.

Purchase for retention

Make sure you always purchase rental properties for retention purposes. The longer you hold, the better equipped you’ll be to take advantage of long term appreciation in the property. You’ll also concurrently be writing down any mortgage note you’re paying off, thus increasing your equity valuation in the property. If you make a plan for purchasing a property at set intervals (for example, every couple of years – or yearly, even better), then you’ll be able to slowly accumulate a portfolio of properties (your “stable”) that will continue to throw off ever-increasing amounts of cash flow, as well as capital appreciation.

The power of leverage

Make sure you take advantage of leverage, when possible. While making all cash offers on properties may be advantageous to netting the best price on any one property, it is not advantageous to utilizing other people’s money to grow your investments through the concept of leverage. If you can obtain a mortgage, by all means do so. The greater the loan to value ratio the lender will allow, the better. Just make sure you don’t overextend yourself, and that you’ve double-checked your expense numbers properly. You want to ensure you have a comfortable positive cash flow on any property you’re thinking of acquiring.

Beware the bargain basement

While the concept of “stealing” a house in an auction or other competitive bid situation sounds really appealing, always be wary of the cost of a “steal.” Finding a great bargain in a poor location is like finding fool’s gold: you’ll end up paying for it down the road. Long term difficulties with obtaining market rent, high vacancy rates, and terrible capital appreciation tend to make that “steal” a steal for the seller! So be very, very careful when a deal feels too god to be true. It probably is.

The location axiom

Naturally, more desirable neighborhoods will yield greater upside potential in terms of capital appreciation. This does not mean buying a property in a rundown area is bad. Just be aware that a cheaper price for a lesser neighborhood will require you to understand the vagaries of dealing with the neighborhood…which will probably be run down in five or ten years, or whenever you will be selling the property. Keep your sights set realistically. If a bad neighborhood is all you can afford, make sure you don’t expect much from the property n terms of its capital appreciation over time. Or, at the very least, buy in a changing neighborhood – one that’s experiencing the start of some gentrification. (Hint: let the changing face of local stores be your guide here.)

Cash flow is great, but…

Make sure you always keep an eye on the capital appreciation rate in any given area you’re searching in. It’s the holding and growth of the marketplace of houses surrounding your building that will add value to your property in the long run. Be very mindful of this fact. Your year-to-year cash flow is obviously important to paying the bills and allowing yourself a profit on a regular basis. But it’s when you are ready to sell the building that most of your profit should be made…

Create an individualized investment strategy, and stick to it

Critical to this concept is that you’ll need discipline. In addition, you’ll need a plan. And most importantly, you can’t have discipline and a plan without also being scrupulously devoted to research and numbers-crunching for any potential property you are looking at. Simple math errors, not doing total due diligence on a property, accepting seller information only – these are like death to a property investor. You cannot tolerate mathematical mistakes. If you know this is not your strong point, then enlist the aid of a partner – or at the very least, seek the outside help of a trusted, math-oriented friend. Either way, this is the simplest way to mess up. So don’t.

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Banco Not-So-Pop-u-lar

Don’t invest in a vacuum

Let’s face it – we live in a world-wide economy. And property investing in the United States requires being cognizant of the potential pitfalls that await us from overseas markets. It seems like every day there are new, gloomy reports of impending financial disaster coming out of Europe. The latest news comes this week from Spain, as their banking industry seems poised to collapse. Banco Popular, as well as Bankia and Bakinter, three of the largest banks in Spain, have been downgraded by the credit ratings agency Standard & Poors. S & P lowered their ratings to near-junk standards, as these banks have been hit hard by increasingly bad loans, especially mortgages.

In addition, Bankia, which is Spain’s largest mortgage maker, announced on Friday that it required an infusion of an additional 24 billion dollars to stay afloat. Spain had seized the bank earlier this month, due to the bank’s huge portfolio of delinquent mortgage loans. The greatest fear is that Spain will not have the ability to raise the funds to keep Bankia alive. If this mammoth lender were to collapse, the entire European banking community will be rocked to its core. Of course, the reverberations will be felt here in the states, much like a financial tsunami hitting our shores.

The bursting of their bubble

Spain is currently experiencing the same bubble burst in real estate that began here several years ago. However, their central government may have waited too late to try to repair the rupture to their economy. There is a double whammy on the horizon for them: the genuine threat of a run on Spain’s banks, combined with the government’s inability to raise funds to cover all the bank losses in the short term. Currently, short term debt is being offered by the government there at a whopping 7 percent in order to entice foreign investors. It’s a very ugly situation indeed.

Will Germany have to come to the rescue again, as they have several times already with Greece? It’s looking more and more like a strong possibility. But at some point, Germany itself will be simply unable to financially take the lead as the main country in helping to bail out weaker European Union countries. The writing’s on the European wall – and it’s not looking very positive in the long term.

For this reason, property investors here in the Unites States should be extremely concerned about the negative consequences that lie in wait for us. What exactly does this mean for the small investor in our country and the ability to obtain an investment property mortgage? Will the overseas crisis come to our shores? And if so, when?

The tsunami ahead

As I’ve written before, I think this financial tsunami will occur in some form, and will be making its way over the Atlantic to our shores by late this year. And the net effect for small property investors will be a further tightening of credit. It will be

much harder to get an investment property mortgage later this year and going forward well into next year as the crisis in Europe develops and intensifies.

So the end result is that you should be planning your buys of investment property accordingly. If you haven’t already this year, be sure to speed up your property purchases as soon as possible, and do not wait till the end of the year to try to go out searching for property and locking up an investment property mortgage. By the end of this year banks in the United States will be feeling the crippling effects of what is going on overseas. Banks here will try to tighten their credit in order to ensure mortgage repayments, ratcheting up their standards for lending in the process. Small investors will be hit with higher FICO scores in order to qualify for a mortgage, as well as much lower loan-to-value ratios on all new mortgages.

A new bottom line

The new bottom line is that it will be much more difficult to increase leverage on your properties. More stringent qualifying standards will apply not only when you try to purchase new investment property by obtaining an investment property mortgage, but also when you refinance any of your existing properties. So your ability to leverage will plummet, and that will mean more cash out of pocket in order to help finance your new purchases. With less leverage of course, you will not be able to grow your real estate investment holdings as quickly. It will also create a scenario where your returns on investment will be substantially reduced as well.

So be aware of all that’s going on in Europe right now. Banco Popular, Bankia and Bankinter are not merely names of distant lenders – their failure would have far-reaching effects on how you purchase your investment property here in the states. To protect yourself, purchase and lock in an investment property mortgage now, well in advance of the end of this year. And plan accordingly. You should be planning your next year’s purchases based on the assumption that higher credit scores will be necessary to obtain that investment property mortgage, and your ability to leverage will be lessened. Also prepare for a reduction in mortgage loan-to-value ratios offered by lenders here. This means you’ll have to make up the difference utilizing your own cash on any new investment purchase.

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