The Dangerous Game of No Money Down Deals

Attempting ye old standard "by the book" cookie cutter tactics lamely taught over and over again for single-family investing and applying this to a commercial multifamily deal is a recipe for disaster.  In fact, it is a very dangerous game as the end result is that you, the brand spanking new owner of that apartment property, probably have risk your entire net worth for the privilege.  Congratulations, cliff dweller.   

When was the last time you were, figuratively speaking, thrown under a bus?  With respect to nothing down deals, too often people go willingly- under the bus.  Year in and year out we get emails seeking guidance on multifamily deals where the buyer has limited or no capital; the proverbial nothing down deal.  Lets me be succinct: DON'T DO IT!  There. I said it.

Few people seem to appreciate this response prior to gushing with deal specific particulars.  Doesn't matter- don't do it. I don't care if your uncle is giving you the deal of a lifetime.  Sounds harsh, doesn't it? Let me explain.

Maybe your uncle is a really nice guy, you took care of him when he broke his ankle and he's doing a good deed in return.  With a three million dollar deal where the first mortgage is two million and Good Uncle is taking back a second for a million, you are toast (good intentions or not). 

First of all, on the surface, Good Uncle has set the purchase price at three million.  Are you going to spend a few thousand on a commercial appraisal to validate that a reasonable price is three million?  At this level of leverage (100% financing) every available dollar will be going to debt service.  In reality, there will likely be a monthly deficit.  How will your relations be if the payment due on the second mortgage  is $5,000 monthly, but the asset is only kicking out $3,000 monthly?  Uncle wants his money.  After All, you bought the deal.   

So here you come, with limited input on Deal Structure, maybe some property management experience, and limited to No Working Capital.  You are... crispy toast just waiting to happen. 

It really boils down to Capacity.  Yet, capacity by itself is not enough to make the deal work if every other aspect is out of whack with reality (including valuation).