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 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?”
– “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.
The one piece of advice I give universally is that you should NOT use your credit card to finance your real estate investment – EVER. No matter what the end game is, there is far too much risk involved with that.
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?
If you’re close to retirement age, you should not be looking at your house as equity. However, if retirement is still some years away and you have the least $200,000 worth of home equity, you should consider using $50,000 of it toward a down payment for investment property. Before you do this, however, make sure you can afford the extra payments for a ‘just in case’ scenario if your investment doesn’t work out as planned.
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 a great way to find the extra money. Vendors are often happy to provide this as these types of loans are secured against the property itself and gives them a steady stream of income in their pocket every month. But before you go into this type of situation, you have to make sure that the vendor is willing to do it, and that you can handle the extra payments. This method shouldn’t be used, however, if you can only get 75% bank financing and have no down payment.
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.
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.
So I’ve pointed out why no money deals are very risky- because you have no equity in the property and they rarely produce monthly cash flow. But, whatever you do, don’t give up your real estate investing dreams just because you have no money right now. There are ways you can find the money. Follow these tips and you could have a property in no time:
1. Get control over your finances. Pay down your debt and start saving as much as possible. You don’t need a lot of cash, but there probably aren’t many people that will partner with you if you are terrible with your money.
2. Look to your home. If you own a home and have some years left before you were planning on retiring and have a reasonable amount of equity in your home (over 25%), consider using a portion of the equity in your home to get started with investing in another property.
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 the investment property is sold, the split goes this way; the partner gets back the down payment before anything else. Then the remaining profits are split 50-50. Reduced equity for us is worth the reduced risk.
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