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No Money Down Deals - 100% Financing
There have been countless books, seminars,
coaching programs, and more produced on this subject. There are also
probably an infinite number of ways to accomplish a "nothing down"
deal. We'd like to share with you just a few of the ways that we
ourselves have used up to this point, and explain how they worked.
Once we're done, you should have a good understanding of why it really
isn't all that hard to invest in real estate without having a huge bank
account.
The basics: 100% financing!
Probably the most widely available form of No
Money Down is to get a 100% financing loan. These loans tend to
require better credit than other loan programs, although every lender
has their own set of requirements and some are really quite flexible
and forgiving. The basic idea is that if you are purchasing a $100,000
house, the lender(s) will lend you the entire amount needed, without
you having to come up with a down payment at all. Pretty fantastic
right? Right! In exchange for this privelege however, they will
usually charge higher rates since they are technically carrying more
financial risk if you were to default on their loan. You will in turn
have higher payments on the property because of the increased rates, as
well as the fact that you are financing a larger amount of money than
if you put in a 10% or 20% down payment. The biggest reason why we are
often happy to pay these higher rates, is that it enables us to keep
whatever cash we have, in our pockets for a longer time. 100%
financing is really nothing more than a deferred down payment. Instead
of paying your down payment all at once, you get to pay it in small
increments over time. We never like to have too much of our own money
tied up in any one transaction, so this can be an ideal solution as
long as the increased payments don't render our deal unworkable.
Typically, 100% financing is not done in a single
loan. You will usually receive two loans, one at 80% of the purchase
price and another at 20% of the purchase price. There are other
variations as well, this is just the most common in our experience.
They are often but not always from the same lender, and the smaller
loan amount will nearly always be at a higher rate since it is in
"second position", which carries more risk to the lender. The Motivated Seller: Carry Backs! (See Seller Carry )
Another great way to get into a deal without your
own cash, is to get the seller to "carry", or give you a loan on, a
certain portion of the purchase.
- For example if you had your seller
finance 20% of that $100,000 purchase for you, then you would only need
to get a single 80% conventional loan. This has all kinds of added
benefits, from getting lower rates than you would at "the bank", to not
reporting the seller financing on your credit. It takes a special kind
of deal and seller in order for this to be available, but it happens
all the time.
- There is no actual limit on how much a seller can
finance by the way. We have done deals where the seller financed the
entire purchase for us at a very generous rate!
- We find it is
absolutely ALWAYS worth asking if a seller is willing to carry
financing for us. It actually works out better for them in the long
run as well, since they will receive much more money over time than
they would all at once. It carries certain tax advantages for them as
well.
Easy Money: Hard Money!
There is a kind of financing commonly referred to
as "hard money."
- This is a somewhat misleading name, as what it really
means is that the loan is secured by a "hard" asset, such as the piece
of property in question. Hard money lenders are often private
individuals or small companies that have a large amount of credit lines
available to them.
- They can borrow at a low rate, and lend to you at a
high rate. As long as they feel secure enough in the deal, they will
loan the money without being as concerned with your own personal credit
or finances as the bank would be.
- For the right kind of property, hard
money can actually be pretty easy. It does not come cheap however!
Hard money is often at DOUBLE the cost of other forms of financing, or
even more. So it really does require you to have a truly excellent
deal, and to know exactly what your plan is with that deal.
- The really
great thing is that hard money lenders will often lend you the money to
BOTH buy the property, AND fix it up!
- As an example, we had a property
that was appraised at $259,000 if it was all fixed up, we could
purchase it for $100,000, and it needed $65,000 worth of repairs. This
means we are purchasing the property for less than HALF of what it
could be worth once fixed up.
- So if we borrowed the entire $165,000,
that loan is at roughly 64% "loan to value" (165,000 / 259,000 =
63.7%). This means the lenders is very secure if they were to loan us
that money, since there is well over 30% equity remaining in the
property.
- Most hard money lenders won't lend on anything higher than
75% loan to value, though some might go slightly higher on certain
deals.
Paper or Plastic: Charge It!
This final approach won't apply to everyone, if
you can do it however it can be the quickest and easiest methods
around.
- Use your credit card! This is probably the approach that gets
us the most horrified looks from people when we explain it. The
perception is that credit cards are so terribly expensive, that you
could never make money by using them to buy things. Nothing could be
further from the truth.
- Here's how: Say you have a house that would be worth $50,000
once fixed up, and you could buy it for $20,000 (and yes, these do
exist, we have bought them ourselves!)
- If it needed say $15,000 in
total repairs, then you would need a total of roughly $35,000 in order
to buy the house and fix it up (actually slightly more due to title
costs, but this is close enough).
- Now if you have a credit card with
say, a $100,000 limit (they are also readily available to those with
good credit), you could quite comfortably purchase the house with a
credit card check, charge all the repair expenses, and once complete go
refinance it into a traditional loan, and keep it as a nice positive
cash flow rental property.
- Even if your credit card was at 12% APR (1%
per month), if you completed the project in 3 months you would have
paid only a little over $1,000 in interest.
- This is a true bargain,
considering you didn't have to pay any loan closing costs, up front
points, fees, or anything else.
- Plastic truly can be your best friend!
Is That All? Never!
There are more ways to do no money down than we
could ever hope to cover, and we hope this gives you a few ideas as to
how you might be able to do it yourself.
- We are absolute believers in
the idea of never putting your own personal cash into a deal if you can
in any way help it, and
- if you ever DO put your own money in, make sure
it's for as short a span of time as possible.
- The major reason for
this is so that your cash remains completely liquid for any situation
that might arise, from debt service, to personal medical emergencies,
or anything else.
- If your cash is tied up in a property, it can take
weeks usually to get access to it again and could cost you quite a
bit.
- It leaves your money at the mercy of other people (loan brokers,
underwriters, appraisers…) to get it back out again
Click on the picture to check out these resources for more information on No Money Down Deals:
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