Why Investing With No Money Down Might Be a Terrible Idea (& What You Should Do Instead)
“I started with zero and became a millionaire within one year.”
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You’ve perhaps seen these words online in some ad, and at some point in your life, you’ve probably even clicked on it out of curiosity. Maybe you were even hoping that just like the person in the ad, you could get lucky too. These ads generate a bad reputation for practically anyone who tells you how to make money. But the truth of the matter is radically different, especially in real estate.
While you may think that with no investment, you have nothing to lose, in reality, investing little to no money can actually ruin everything and make you lose more than you could have imagined. We’re not just talking about lost opportunities here. Think about this quote, “It takes a lifetime to build a reputation and only five minutes to lose one.”
You Need Money to Make Money
Some no money tactics do have merits. But even when that's the case, you shouldn't be to quick to jump on an opportunity. To make money, you need money. So when you're not investing your own funds, you would actually need to convince others to invest theirs. But losing someone else's money is worse than losing your own. That's because not only are you ridden with the burden of guilt, but also along with losing that money you have lost your reputation as well. If you went out and got a loan, you're even worse off. You might not be able to pay off your debt, and when that happens, things start to really go south fast.
Then How Does One Make More Money?
The surest way to start making money is by following the age-old advice of working your 9-5 job where you either work for someone or work on fulfilling your entrepreneurial dream. For those willing to push their limits, they can get another job, as time zones are flexible and you can always work before 9 a.m. or after 5 p.m. More time spent working means more money in the pocket. It’s as simple as that. Nothing comes easy in life, and if it did, then everyone would be driving sport cars and wearing designer clothing. If you want to save money, though, you need to go beyond that.
That money you’re making will obviously be used to cover your living expenses. But keep it lean, and you’ll be able to set some aside. You need to make a sacrifice and live frugally for as long as it takes to save up enough to kickstart your real estate investment journey.
Sure, you need money to make money, but you don’t need millions. All you need is enough to get you started (I started with $50,000 in savings after four years of laboring on dirty construction sites). And once you have some disposable income at hand to experiment with, you can start thinking about generating additional income. That’s when you can put it into real estate. Why real estate? It’s tried and true, well known, and it just works. Think of it this way: “Bricks and mortar will always be your bread and butter.”
So what do you do with the small amount of money you can invest?
#1 Fix and Flip
This is a great way of investing in real estate, and you don’t need to hold the property for long. This method works by purchasing a property and then quickly “flipping” it at a proper market rate. While you can get lucky with a super cheap property in decent condition, these aren’t always available. Therefore, many investors tend to buy at heavily discounted prices due to the condition of the house. The next step is to do some renovations and then sell it at a much higher price than what you paid. I suggest starting with buying properties that only need a basic cosmetic renovation before tackling bigger projects that might need a complete structural overhaul.
This method is lucrative for real estate investors because most home buyers like to pick up a home that is ready to move into and often have very little time to get the major repairs done or renovations taken care of.
Alternatively, one can also flip a property if they identify a seller and a buyer for a property at the same time. If that’s the case, the investor doesn’t even have to put in any money at all. It’s not that common, but it allows you to make a very quick buck with minimal effort. I’ll go into a bit more on this “wholesaling” strategy below. The trick to “proper” fixing and flipping is identifying a property that is priced below its market value or that with minimal work that could still fetch a healthy profit if sold at market rates.
Repairs and renovations can go a long way in increasing property value. But it does take some expertise and experience. Also, if something goes wrong, your costs will rise, eating away your potential profits.
Either way, you make money when you BUY and not when you SELL. Study the different negotiation strategies available and make sure to BUY DIRT CHEAP and WAY below market value.
A great way to invest with little money, wholesaling may not get you great results and large profits quickly, but it can teach you a lot about the ins and outs of real estate investing. Through this option an investor gets a property by buying a contract, and then quickly selling it so that a profit is made.
Wholesaling is tricky in the sense that you need to be aware of the laws in your state and be able to identify low cost properties on which a decent profit can be made. The advantage of this kind of investing is that one doesn’t need to make any repairs to the property, so it can be sold very quickly. I have wholesaled a few properties in the past but have made sure to always close on the transaction first before selling to someone else. Stay tuned over the next few weeks, as I’ll be writing an in-depth article about the best practices when it comes to wholesaling.
#3 Buy and Hold
Usually performed with the intention of holding onto a property for many years, buying and holding a property involves taking complete charge of it after making the payment. Properties can be bought at surprisingly low prices (especially in the Midwest — for example, Ohio, Michigan and Indiana), so you don’t need to be a millionaire to get started. Once the market has improved, investors can sell the property for good returns.
These properties can have good capital gains depending on where you invest. (Try and stick close to infrastructure. Infrastructure like a hospital or large factory and major employer like AK Steel in Middletown, Ohio will always show a solid demand from tenants and home owners.) However, you need to have a lot of patience since significant returns will take time. Also, NEVER base your decisions on speculation that property prices will rise. Only base your decisions on the numbers as they stand today and make sure that those numbers are getting you a step closer toward achieving your cash flow end goals. Any appreciation should just be considered the cherry on top.
Something to point out also is thanks to the fact that you still have your day job, if the market crashes, you’ll still get an income. You won’t be dependent on your selling for a profit and you’re not knee-deep in debt. That’s always good to know when a 2008 crash scenario takes place.
The trick is to combine all these different methods and steadily increase your cash flow. Take the money you earned with one deal and put it into a next one. Let that money you’re making generate some cash on its own. Let it snowball and allow the magic of compound interest to do its thing. If you do it this way, the patient way, you’ll be able to start living life on your own terms bit by bit. What’s more, you can start to transition into a new lifestyle. No sudden changes, which is a very comfortable way to grow your wealth.
Whatever strategy or mix of strategies you choose for investing in real estate, keep in mind that this way is not for those who want to get rich quickly. There is NO such thing as getting rich quickly so don’t ever believe in that. Real estate investing takes plenty of hard work and patience. Also, it is not always easy to quickly liquidate your holdings, so when you invest, be prepared to let the investment sit there over a period of time and be patient. After a while, you’ll see money coming in, slowly but surely.
My final words today were given to me by someone who was worth $150M dollars: “Wake up before everyone, go to sleep after everyone, work hard, work smarter.”
Investors: Weigh in! Do you like to use no money down strategies? If not, what’s your investing method of choice?
Leave a comment below!