I got home from a party at about 3:00 am hungry for some leftover chicken wings, so I threw them in the microwave and sat in front of the TV to enjoy my snack. I was 20 years old at the time and already thinking about being a real estate investor when the King of Late Night showed his face on the screen. Carlton Sheets proceeded to tell me how easy it was to buy real estate with no down payment. That was great, because I was broke and was actually feeling pretty lucky to have the leftovers in the fridge.
I wanted nothing more than to start my investing career. I read book after book, and watched late night program after late night program; all telling me it was not only possible, but easy. The truth is it is possible, but far from easy. I learned how and implemented each of the following four strategies. Let me be clear about one thing before I dive in. Just because it is possible to buy properties with no down payment does not mean that you should not have any money. It is important to have reserves when you have rental property. Ask me how I know… There are other strategies to build income, so I don’t want there to be confusion. You should have money to be a landlord, but if you can buy without using it, why not?
- Lease Options – this might be my favorite because it is the one that really got my wife and I going. I owned a few houses before I really learned this, but this is the strategy that got me to go full time as a real estate investor. At this point in my career I think there are better ways to do things, but this is by far the easiest to get started without using your own money. It is easy to explain to sellers and you don’t need cash or credit to qualify. The way this works is you lease a property with an option to buy it at some point in the future. My suggestion is to lease it for 10 years or more so you can withstand some market fluctuation and still be profitable. You will then sublease it to cover your payment to the seller, and hopefully make a small spread. Your option to buy becomes valuable as the home increases in value because your option price is locked in. You can exercise your option and keep the home, or you can flip it to realize your profits. I like this strategy because you can get some of your profit now when your tenant or tenant/buyer gives you non-refundable option money, and you will get big pay days down the road. I go into a lot of detail about this strategy in my book at www.45dayinvestor.com. I have never been asked to put money down on any lease option I have done.
- Owner Carry – The most common type of owner carry deal that I have done is a subject-to, which I will detail below, but there are several different ways you can structure these. The one thing in common with any owner carry is that you will get the equitable title so you will actually own the home and get the tax benefits that go with that; unlike the lease option, which technically you are only leasing. These are a little harder to put together because the seller is taking on more risk and is hard to explain. On a subject-to, you are taking full title to the property subject to any loans/liens that are already in place. So you own it, but need to satisfy the loans or at least keep them current. You are not actually responsible for any debt since you did not sign on the note, but if you do not keep them current the lender can, and will, foreclose and take the house from you. This transaction is pretty simple and the one document that is signed that makes this entire thing work is the deed. Obviously there is more to it, but to keep it simple think of it as them signing over the house to you and you taking over their payments. If they are currently in foreclosure, you will also need to catch up all the back payments. Many of you are reading this and thinking that it is illegal to buy a house without paying off the loan. Well you can believe that and not do these, or understand that it is legal and people do it every day. The seller is violating a clause in the loan, but it is not a crime to do that and the recourse is the same as any other default. The difference is, most lenders really only care about one default and that is when you stop making payments. Chances of them calling a loan due based on your buying the home is small. With that said, there are ways to structure these to increase your chances of success. I like doing deals like this for several reasons, but one important one is that you own the home so the previous seller is out of the picture. With a lease option you will occasionally still need to work with the original seller, which may cause problems. One example could happen in 8 years when you are about to exercise an option at half the current value. Sometimes sellers will forget that you got them out of a bind when they see you are making a profit.
- Hard money refinance – I feel like I have beat this to death, but if you have not heard of this, it could easily change your life. This is really working right now in Minnesota, as the prices on wholesale deals have not fully recovered. It works best in the lower price points. There are deals that this works for in all markets across the county, and even if you struggle finding them, it is a good strategy to get to know. Opportunities will present themselves if you keep your eyes open.
The basics of this strategy is to find a deal where you can buy it and fix it for 70% of the property’s repaired value. Most hard money lenders, including Pine Financial, will loan 70% of the after repaired value including all the purchase, repairs and closing costs making it a no money down deal for you. Once the property is completely fixed up, you can refinance the hard money loan with a conventional low interest permanent loan. All of us in our office use this strategy. For more detailed information on how this works you can download a free report here.
- Partnerships- I love and hate partnerships. I see a lot go bad, and had a real bad experience with one; but it is a great way to purchase properties without money. In fact, you can use partners on just about any type of real estate deal to limit or eliminate the need for your cash. I will sometimes use partners with the hard money refinance strategy because it is easier for them to get the refinance done. It gets harder and harder to get loans as your portfolio grows so partners enable you to keep you going. The best type of partner, from my experience, is someone who wants a return on their money and is not really looking to be actively involved with your business. I like this because I like to be in control, and limited input means limited conflict.
I suggest proceeding with caution when using partners, but it is definitely worth your attention; especially if you are looking for no money down deals.