Getting Started in Real Estate for the Penniless - Part Two
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:
- "If I have no money of my own to invest right now, should I consider approaching other investors to find out if they would like to partner with me? Frankly, I'm afraid of the response I will get when they find out I have no money. But I would really like to get started in real estate investing sooner than later."
- "I've heard that you can use credit cards, owner financing or a home equity line for a down payment. Is this a good idea, and how soon could I expect to see a positive ROI (return on investment) 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.
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?
As for the other methods - using home equity and vendor take back financing - it really depends on your goals and where you are right now in your life. If you're 65 and getting ready to retire, I am not sure I would use the equity in your home. But if you are under 50 and have $200,000 equity in your home, I would definitely consider a $50,000 home equity loan for a down payment on a real estate investment - assuming you can cover the extra payments if something goes wrong with your investment.
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.
As for owner financing (aka vendor take back financing)- I love using owner financing. We've used it several times when we don't quite have enough for 25% down and the bank won't lend us any more than 75% on the property. Vendors are often happy to oblige with a loan for the difference. It's secured against the property, it gives them a nice guaranteed rate of return each month, and it's cash in their pocket each month. If your property will cover these extra payments and the vendor is willing to do it, then this is your best option. BUT - if you have no down payment at all and can only get 75% financing from a bank, you shouldn't use this method to finance the rest.
Take it from us, however- buying properties with no money down does not mean it won't cost you in other ways! We've learned from experience.
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.
No money down deals are not only MUCH riskier because you have no equity in the property, they are also pretty hard to find because they rarely cashflow. If you have no money for a down payment on your real estate investment, then, in the following order, this is what I suggest:
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. 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. Have no money and you are currently a renter or don't have enough equity in your home? Find a great property - one where the rent will cover the costs with as little as 10% down. Get an accepted offer and then find a partner that has the money to invest in the property with you. Be prepared to sell yourself AND the property.
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. - 23311
But, when I get questions like:
- "If I have no money of my own to invest right now, should I consider approaching other investors to find out if they would like to partner with me? Frankly, I'm afraid of the response I will get when they find out I have no money. But I would really like to get started in real estate investing sooner than later."
- "I've heard that you can use credit cards, owner financing or a home equity line for a down payment. Is this a good idea, and how soon could I expect to see a positive ROI (return on investment) 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.
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?
As for the other methods - using home equity and vendor take back financing - it really depends on your goals and where you are right now in your life. If you're 65 and getting ready to retire, I am not sure I would use the equity in your home. But if you are under 50 and have $200,000 equity in your home, I would definitely consider a $50,000 home equity loan for a down payment on a real estate investment - assuming you can cover the extra payments if something goes wrong with your investment.
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.
As for owner financing (aka vendor take back financing)- I love using owner financing. We've used it several times when we don't quite have enough for 25% down and the bank won't lend us any more than 75% on the property. Vendors are often happy to oblige with a loan for the difference. It's secured against the property, it gives them a nice guaranteed rate of return each month, and it's cash in their pocket each month. If your property will cover these extra payments and the vendor is willing to do it, then this is your best option. BUT - if you have no down payment at all and can only get 75% financing from a bank, you shouldn't use this method to finance the rest.
Take it from us, however- buying properties with no money down does not mean it won't cost you in other ways! We've learned from experience.
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.
No money down deals are not only MUCH riskier because you have no equity in the property, they are also pretty hard to find because they rarely cashflow. If you have no money for a down payment on your real estate investment, then, in the following order, this is what I suggest:
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. 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. Have no money and you are currently a renter or don't have enough equity in your home? Find a great property - one where the rent will cover the costs with as little as 10% down. Get an accepted offer and then find a partner that has the money to invest in the property with you. Be prepared to sell yourself AND the property.
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. - 23311
About the Author:
Learn How to Retire with Real Estate with Daves free Real Estate Investing Starter Tips Guide. Learn how to find money for real estate deals, create financial freedom, positive cash flow and massive wealth with tips like: How to find quality rental properties, finding and keeping great tenants, and easy ways to make more money with real estate.
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