When people ask me how to find money for their real estate deals, they often aren’t happy with my answer. Looking for easy solutions that don’t require any work or sacrifice on their part, many people turn away disappointed from my advice.
But, when I get questions like:
– “Should I approach other investors for partnering when I have no money for startup? I feel like I will be swallowed by sharks, even though they all seem nice enough. I have seen several potential properties and I need to make the big leap to action.”
– “I hear a lot about using credit cards, home equity line or owner financing for a down payment on a new investment property. What is a realistic time line to see a positive return on investment (ROI) to reimburse funds?”
– “I’ve heard of Robert Allen’s success with “no money down, cash back on closing” deals- how can I get involved with something like that?”
My best advice for someone who wants to get started in real estate investing is to track income and expenses every month- the goal is to see whether you are spending more or less than what you make. Once you’ve figured that out, you should adjust your lifestyle so that you are spending less than you make and any excess money should be used to pay down your debt and start saving money for your first real estate purchase.
One place you should definitely never look to to find the money is on your credit card. True, some credit cards have huge limits (sometimes enough for a down payment on a house), but there is too much risk in real estate to make that a safe investment.
Credit cards can charge 18% or more interest. That’s a lot more than any bank. What if you borrowed $20,000 on your credit card and that great investment turned out to be not so great? Do you really want to pay 18% interest on the $20,000 now due? Do you know how long paying that off would take?
Some people turn to the equity in their homes. This can be good or bad depending on your situation. For example, if you’re about ready to retire or are over 65, then this could be a bad idea. On the other hand, if your home has about $200,000 worth of equity and you’re younger than 50, it could be an excellent choice- as long as you think you can handle the extra payments if something were to go wrong with your investment.
Properties that are ‘good deals’ are properties that pay for the extra payments that a $50,000 home equity loan will result in as well as the monthly expenses for the property itself. That’s what makes using home equity a good way to finance an investment 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.
But be careful- we’ve learned the hard way that purchasing properties for no money down doesn’t mean that you won’t pay in other ways!
Don’t confuse using home equity or owner financing with no money down real estate investing. They are nowhere near the same thing.
What makes no money down so risky? Well, for starters, you would have to borrow 100% of the value of the property. That means if property values drop, even by as little as 5%, you’ll owe more money than it’s worth. And you probably won’t be able to afford it, which will result in foreclosure. This sort of thing has been happening frequently in North America lately.
It is very hard to find a property that will make you money if you’ve purchased it using 100% financing. On top of the purchase price of the house, you’ll also need to come up with 2-3% of the purchase price to pay for a lawyer, property inspector, taxes and things like that.
Therefore, the risk to no money down deals is very high because you would have no equity in the property and would not be making much income from the property due to the high monthly payments. If you’ve found the perfect property to invest in but have no money for a down payment, then there are some things you should try:
1. Start acting like the master of your money. Get out of debt as soon as possible and start to save. You may not be able to save a significant amount at first, but a potential partner will look on you more favorably if you show that you are able to manage your own money.
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. If you rent and don’t own a home (or at least not one with equity), it becomes very important to find a piece of property that would allow you to charge enough monthly rent to cover the property’s monthly costs with as little as 10% down. Then it’s just a matter of finding a partner to invest in the property with you. Remember- finding a partner requires you to show that you are serious about investing and are good at managing your own finances.
Trust us, between the two of ‘no money down’ and finding a partner, finding a partner is a much better way to purchase a property. We’ve done deals with no money down, and they’ve always ended in disaster. But on those occasions when we’ve found a good partner, those deals have all been huge successes. When you have a partner, they bring money for the down payment to the table; and what you bring to the table is the research and the promise to do the work involved with overseeing the property. Working with a partner enables you to buy good properties in good neighborhoods instead of wrecks in bad neighborhoods. This also gives you equity right from the beginning and lowers mortgage payments. When the property needs repair and the rental income won’t cover it, costs of the repair are divided with the partner 50-50. Ownership between us and the partner is also 50-50.
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!
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