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.
So when people ask me:
- "Should I find other investors to partner with if I have no money of my own? This seems like a daunting task and I'm not sure how to go about it. But, I really want to get started investing in real estate as I've recently seen several nice investment properties."
- "Would you suggest I use owner financing, home equity line or credit cards for a down payment on a new investment property? And if so, what is the time line to see a positive 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?"
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.
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.
If your real estate investing deal 'goes bust' you're going to be stuck paying 18% or more interest on whatever you put on your credit card. Can you imagine how many years it would take to pay off $5,000, $10,000 or $20,000 at 18% interest?
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.
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.
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!
No money down real estate investing is VERY different than buying a property without using any of your own money for a down payment.
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'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. 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. If you rent or don't have any home equity, then you need to do some research to find a great property that could be purchased with as little as 10% down. In this case, a great property is defined as one where the rent will pay for the expenses of the property. Once you find it, you need to get a partner with money to invest and no time to do research of his own. This requires you to sell yourself as well as 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.
Because we are 50-50 partners, we split the profits of the sale evenly. By profits, I mean whatever is left after the partner gets his down payment back. By having a partner, you're gaining opportunities you've never could have had on your own while reducing your risk. It's a great deal. - 23226
So when people ask me:
- "Should I find other investors to partner with if I have no money of my own? This seems like a daunting task and I'm not sure how to go about it. But, I really want to get started investing in real estate as I've recently seen several nice investment properties."
- "Would you suggest I use owner financing, home equity line or credit cards for a down payment on a new investment property? And if so, what is the time line to see a positive 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?"
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.
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.
If your real estate investing deal 'goes bust' you're going to be stuck paying 18% or more interest on whatever you put on your credit card. Can you imagine how many years it would take to pay off $5,000, $10,000 or $20,000 at 18% interest?
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.
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.
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!
No money down real estate investing is VERY different than buying a property without using any of your own money for a down payment.
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'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. 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. If you rent or don't have any home equity, then you need to do some research to find a great property that could be purchased with as little as 10% down. In this case, a great property is defined as one where the rent will pay for the expenses of the property. Once you find it, you need to get a partner with money to invest and no time to do research of his own. This requires you to sell yourself as well as 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.
Because we are 50-50 partners, we split the profits of the sale evenly. By profits, I mean whatever is left after the partner gets his down payment back. By having a partner, you're gaining opportunities you've never could have had on your own while reducing your risk. It's a great deal. - 23226
About the Author:
Learn How to Retire with Real Estate with Dave's free Real Estate Investing Starter Tips Guide. Learn how to find money for real estate deals, create financial freedom, positive cashflow 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.
posted by X - Men @ 12:42 AM
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