No money down dumb question..

7 Replies

Okay, I've been on the site for a few weeks, so please pardon my ignorance, but I feel like I'm missing a crucial piece of information that is likely so obvious its not really brought up when people talk about no money down.

I don't understand how one can profit with no money down in a flip, or buy and hold deal. If a lender is covering 80% and OPM is putting down the other 20%... how are you entitled to any return? How can you claim equity/cash flow?  Is this something you negotiate with the private investor supplying the OPM?  If you could point me to a blogpost that explains this, that would be helpful.

Thanks!

You might partner with someone who will put in the money for the purchase and rehab, as long as you split the profit with them.  You give up a lot of your profit, but that means you don't have to bring your own capital to the deal. And then you have some money you can use for the next deal, maybe a down payment on something else.

Originally posted by @Andrew Hansinger :

Okay, I've been on the site for a few weeks, so please pardon my ignorance, but I feel like I'm missing a crucial piece of information that is likely so obvious its not really brought up when people talk about no money down.

I don't understand how one can profit with no money down in a flip, or buy and hold deal. If a lender is covering 80% and OPM is putting down the other 20%... how are you entitled to any return? How can you claim equity/cash flow?  Is this something you negotiate with the private investor supplying the OPM?  If you could point me to a blogpost that explains this, that would be helpful.

Thanks!

A loan is a loan. So if you borrow 80% at 3 points and 10% with a 1 year term that's what the lender is looking for as repayment. If you buy and sell for twice the amount that has nothing to do with the lender. They will paid off as 1st lien at closing and your loan is satisfied. Now a partnership depends on what arrangement you have. 

Basic profit scenario.  Buy for $100K.  Lender funds $80K, private investor lender funds $20K.  If you can rent it for enough to cover both loans and expenses, any profit is yours.  If you can sell it for more than $100K plus expenses, any profit is yours.  The lenders don't own the property or the equity in it, you do.  If Wells or BofA funds 100% of my purchase, they are not entitled to anything other than monthly payments or a full payoff when I resell. They are lenders, not partners.  

Originally posted by @Andrew Hansinger :

Gotcha.  So basically don't F* it up.  Sounds stressful and risky, but I guess that's what you get in exchange for no upfront costs.

 How is this different from any purchase with lender funds? Or cash? How is it more stressful than using 80% lender funds and 20% cash you had in the bank.  If you are buying something you can't sell for what you paid, there's a problem regardless whether you use lender funds or cash.

You could also try to be creative and find a seller financed property that you can add value to and split the profits with the previous owner.  There is a lot more to a deal like this then is first apparent so need to have solid projections, numbers, and comps for the flip.

Essentially you have to buy below market value.  A distressed owner situation that has a problem you solve before it hits the market!   Couple that with a high rent/value ratio and you have the recipe for a low/none of your own money opportunity with cash-flow.

I agree partners are risky and I haven't used any.  I've also never borrowed hard money but some have done both with success.  

Best, of course, to cut out all non-essentials and save money to put into your own property  you control @Andrew Hansinger