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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).
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…
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.
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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