How to Buy Multiplex with $0 Out of Pocket – An In-depth Look at Creative Finance

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In this article I am going to touch on the highlights of one Creative Finance technique which can enable you to structure an acquisition with $0 of your money in the deal.  I can not possibly go into as much detail as is necessary within the scope of this article.  But, I do hope to whet your appetite and point the space craft that is your thought-process in the right direction.  Much research on your part will be necessary should you desire to utilize this technique.  This is advanced creative finance stuff; it’s not for the beginner and it’s not easy.  But – it works…

Before I begin with the specifics, I must alert you to the fundamental reality which, although indeed fundamental, nonetheless gets missed by a lot of investors, and it is this:

All value in real estate does not reside in bricks and mortar.  In fact, a lot of value in any given real estate transaction resides in terms of financing and what you can and cannot do with this financing.  A lot of the expandability in any given transaction is therefore a function of the financing package, and the technique discussed herein certainly falls squarely within the subheading of expandability (I’ve covered this concept in many other articles).  And with this, let’s dig in:

Related: 4 Things to Remember When Shopping for Multiplex


Suppose you find and want to purchase a nice little triplex in a solid B neighborhood.  Each of the 3 units in the building can rent for plus or minus $600/month, for a total gross income of $1,800.  Let’s just say, for the heck of it, that you are like me and you manage to finance the entire $120,000 purchase price – it wasn’t easy but you did it.

Now, let’s say that at the time of acquisition 2 out of the 3 units are vacant, and you take this opportunity to immediately remodel the units in order to attract better-qualified tenants.  Let’s say that you finance the rehab with a line of credit, so it doesn’t take any money out of pocket.

Let’s say that between the purchase price and the remodel you are into this deal at $130,000, and fully rented it cash flows over $200/door per month for a total of $600/month.

45 days after the purchase, or as soon as all of the leases are in place, you go to your commercial lender and begin the process of refinancing the building.  Why – many reasons, but mostly because you want to cash out that line of credit that you used to fund the rehab since you want to do another deal just like this one utilizing the line.

Well – your lender advises you that he will refinance purchase and rehab not to exceed 70% of the appraised value.  He orders the appraisal, and let’s just say that the appraisal comes back at $155,000.


Well, of course that’s not enough – you are sharp kid indeed!  70% of $155,000 is $108,500 – that’s what you have to play with.  But, you are into this property at $130,000 of which $10,000 is the rehab.  Besides, you want to wrap the closing costs into the loan as well as pay for the rate caps.

To keep it simple, let’s just say that if you were to take as much money out of the refi as you need to cover your costs, based on a valuation of $155,000 you’d be short about $30,000 relative to being able to cash out the original loan for $120,000.

But, this has to be cashed-out as part of any refinance – or does it…

Related: Pop Quiz: A Challenge in Creative Financing

HERE’S WHAT YOU DO – if you are anything like me, that is…

The total amount of the cash out is $108,500.  You allocate $18,500 toward your finance charges, rate caps, and to recapitalize your line of credit.  This leaves $90,000 available.  You cash out $90,000 of that initial loan of $120,000, which leaves a shortfall of $30,000 – this is where you get creative, as in Ben Leybovich creative…


You move, as in re-collateralize, this $30,000 with another property.  In other words, while this money started out being collateralized by the subject, as part of getting this transaction completed you substitute a different piece of real property as collateral on this $30,000…

This little maneuver is called Substitution of Collateral (Substitution of Security).  Obviously, the lender will need to go along with this, and as far as this is concerned – don’t look to your vanilla banker to saying yes on something like this.  This is an act out of a play called Private Money.

OK – in concept this is as simple as that; you’ve just financed the purchase and rehab of an asset that in the end still cash flows $500/month (less than at the outset since now you’ve financed higher balance, but enough).

Simple it is, but simple it’s not.  I could spend an hour discussing all of the caveats and all of the moving parts.  I don’t have an hour, but I will give you a few pointers here and you know how to find me if you need more information:


The original Note holder must agree to substitution of security; this isn’t something you can do behind someone’s back unless you are comfortable with fraud – not recommended.  So, what kind of lender do you work with that will go along…?


That $30,000 which is now sitting collateralized by a substitute security needs to be SAFE, which means several things:

  1. Substitute security must have enough equity to sufficiently collateralize $30,000
  2. Substitute security must throw off enough income to sufficiently cover the payment of an added $30,000 debt service.
  3. The DSCR (debt service coverage ratio) must be no less than 1.2.  In fact, I suggest that the DSCR should be no less than 1.4 for everyone to feel safe.
  4. Substitute security must be of quality equal to or higher than the original subject.


You must have a workable and reasonable plan as to how you will eventually cash-out $30,000.


Well – there it is.  Just like this you can finance purchase and rehab of a cash-flowing asset with the eventual result of having no money in the deal.  In case you are wondering, yes – I’ve done this rather routinely over the last decade, so this is not just theory.

Someone once told me that not having money is easily overcome in the world of real estate by having knowledge.  They were right!  Some day you will have the money, but for now remember – not having money is not a good reason not to start in real estate.

This is just the tip of the iceberg of what you need to know, but hopefully it gives you a moment of pause.

Thanks indeed for reading.

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Financing the entire $120K is near impossible. Lenders require 25-30% down, on non-owner occupied.

    Maybe a VA loan, and you were going to live there. Or even FHA with low down.

    There are few, if any investors, after 2008 or so, that got a non-owner occupied mortgage, in their own name.

    • I should add, that is with a conventional lender. There are some hard money lenders, and some construction financing options. And some commercial lenders. And friends and families. Maybe there are some “subject to” deals out there still?

      As a first time deal, very difficult with out backup capital. And even riskier without capital. And riskier yet without the knowledge of how to do it, without someone that is experienced holding your hand.

      I just find it easier to have some cash. The deals are faster and less risky.

      • I don’t doubt that you do. What I’m saying is “help a brother out”.

        What rocks should I be turning over? What are the common characteristics of such lenders? How does one identify them? Where does one look for them? What sort of terms do they offer? What sort of ‘secret passwords’ do I need to be saying to these folks once identified in order to get such a thing done?

        • Hahaha Look Riley,

          Money – I mean real money – it has options; it can do whatever it wants. So the question is: why should it do a deal with you? Why – is it cause you are so good; so talented; so knowledgeable; so good-looking?

          The question you are asking is not a simple one to answer. In fact, it can not be answered until you know lots of stuff. This is because the answer is matter of perspective, and you don’t have it. Study – my friend, and eventually you won’t need to ask the question. Feel free to reach out to me 🙂

  2. Why do this style of creative finance? I understand the 100% financing up front so that you don’t need to put up your own money but why the next step? It seems that you have just shifted around debt. Does this benefit you in any way? Did you get a better interest rate or are there tax benefits?

    On a separate note, thanks for the articles and podcasts.

    • Micha – money doesn’t like uncertainty. Money wants to be collateralized be seasoned equity, and more importantly seasoned CF…extrapolate this. Let me know if you need more 🙂

      Thanks for reading and listening! Glad I can help.

      • I believe that what you are saying is that investors/lenders like to have equity in proven properties.

        What I don’t understand is what the benefit is to you as the borrower? Do you get better terms by shifting the collateral to a proven property?

        If there is something I am missing that is not too difficult to explain I would appreciate it.


        p.s. I have not done any deals yet as I am still in school and I live in a high cost area.

        • Micha,

          There is truly a lot that needs to be said here, but the 2 main things to realize are:

          1. While the purchase was financed 100% from the start, the rehab wasn’t. Well – it was by the LOC but it was imperative to cash that out. Therefore, a refi was necessary indeed…

          2. It’s true that the $30,000 overflow could have remained in 2nd position on the subject property, the money was more comfortable (always is) being collateralized by seasoned CF and Equity. Thus, it was moved…

          Makes sense? BTW – being young is not a crime, it is an advantage. You already know more about RE after reading this article and asking questions then most vanilla buyers and even majority of people who call themselves investors 🙂 Good for you! Feel free to reach out by email or phone 🙂

  3. Sara Cunningham on

    Ben every week I learn something from you or rather you seem to write about situations that are right up my alley. This week you did it again. As you know I closed on a triplex about 2 weeks ago. I bought with no money down on a LOC and am in the process of remodeling. 2 of the 3 units are occupied so my main priority is to get the 3rd one refurbished and rented followed by some improvements and cosmetic fixes to the other areas using the LOC which my lender allows me to do. I’ve already raised the rent in the 2 occupied units and even without a 3rd tenant CF is really good. That is the easy part. I know have to cash out and refinance as you point out. However it looks like the 70% ARV will leave me about $6,500 short to pay off the whole balance. My question is what should I do. This is a fairly small amount and I thought about just paying with my own money to cancel that out. I love your idea about cross collate rising and thought of that too but is it worth it for such a small amount? Thoughts?

  4. Mehran Kamari on

    Awesome article Ben!

    Is the equity available in the substitute collateral property subject to the same LTV limit? I’m assuming it is, just checking though!

    Appraised value 100k
    Mortgage for 60k

    Will they only consider the 10k ( equity under 70% LTV) towards collateral?

    Thanks Big Ben!

      • Mehran Kamari on

        Hah! Well I originally meant the commercial/portfolio lenders you work with. After reading your question though, I wonder if you’ve had private lenders/sellers carrying back a 2nd that were willing to do a use equity in a higher LTV on the substitute collateral property?

        I thought I might add that I’m on your boat that creative financing is where it’s at 🙂

  5. WOW! this article is amazing. you have really covered in a nutshell everything I have been reading and studying about creative finance in the last couple months. My goal is to use the same tactics you mentioned in the article. I am currently working on a list that I want to market (direct mail)to absentee and tax delinquents who own triplex,4,5, multifamily or more in my area. So, I can have them owner finance me. Any suggestions or comments would help.

    thank you very much for this great article.

  6. benjamin cowles

    I’m confused. You wanted to be able to use that LOC for your next deal so you needed to refinance with another lender to pay that LOC off to reset it. So even though you were 30k short of refinancing your entire original loan + rehab, didn’t you have enough plus more to cover the LOC? Did this just go completely over my head? Who should be reading blogs like this? I’ve done like zero deals. Am I wasting my time reading this? Or might you recommend particular articles/blogs/keywords I should look into? Thanks. I DO appreciate the stuff you write that I understand. 😉

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