No money down loans strategy help

Buying & Selling Real Estate
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No money down loans strategy help

Joseph King
Louisville, KY · Member since 2015 · 209 posts · 58 votes

I apoligize if this is the wrong forum, it's the closest I could find for my question.

So essentially I was listening to a few of the podcast about creative financing and I came across a strategy I somewhat  understand and essentially its no money down investing. Now my understanding is going to be very general so don't blast me for leaving out details. So it starts,I came across a 12 unit deal for 400k assssed at 500k and 11 of the 12 are rented all the numbers look good and Im ready to finance this deal so I choose to use a commercial loan 20% down with a 25 yr amortization. Now I don't have 20% of 400k which is 80k, so I use a hard money lender to fund the down payment with a short term loan of 1 year im not to sure on the rest of the rates. So I get approved for the loan and the hard money lender funds the 80k. Now I close on the property. Next in a few months I refinance the property with the assessed value at 500k  and take out equity against the property 100k. I pay the hard money lender the 80k plus the interest and keep the remaining for repairs. 

Feel free to tell me how screwed up and confused I am, we were all new at one point. Also excuse any grammar mistakes.

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Doug P.
Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
10y

@Joseph King You have the right idea, refinancing is one way to buy property and have nothing out of pocket at the end. The way you described it used to work years ago but as @Jeremy Pace pointed out banks are stricter these days.

The preferred way to do this these days is either:

1. Purchase the property subject to the existing loans. Borrow the funds for renovations from a private source. Refinance and pay out the seller and the private lender.

2. Or buy the property and renovate it entirely with private funds and then refinance the money back out.

For either of these to work you need to pay less for the property in the first place. So if it will be worth $500k after repairs, your purchase price plus repairs would have to be no more than $400k.

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  • Doug P.
    Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Lesley Resnick:

    I see the approach, but has anyone actually completed this process?  Could they provide actual numbers?

    My understanding is you would need to disclose the other loan to each lender.  Both lenders would need to agree. They will both need to provide their part of the money at closing.  Each lender will want to know they are securing their loan against an asset with 20% equity.

    The other concern is this is really high risk.  If anything goes wrong and you can not refi, you still have the hard money loan to cover and they typically are looking to be paid off in 12-18 months.

    If you can get the owner to hold the paper, which is not always easy, you will be far better off than taking hard money. 

    I haven't done it with hard money, but I have done it by purchasing subject to, and I've also done it by paying cash with a partner. As I mentioned, you can't do this (or it's very very hard) to borrow only the down payment from a private source (partner, HML, whatever), banks don't like that.

    The 'trick' to buying with no money down that most people don't realize is that you have to buy the property below market value. Most people think: "OK this property is on the MLS for $500k, it's worth $500k. I can borrow $400k from the bank so I'll have to borrow the other $100k from somewhere else."

    No. Wrong. Bad.

    Buy that $500k property for $400k and now you already have 20% equity as far as the bank is concerned. Buy it with cash or buy it sub2 and you can refi after either some title seasoning or after the reno is complete.

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  • Champak Shah
    Stone Mountain, GA · Member since 2010 · 267 posts · 72 votes
    10y

    Good discussion here ...

    A   Most out of state commercial lenders will NOT do this deal. Too small loan amount. Also they prefer - something -out of pocket from buyer - 10 % minimum.  Some local - private lenders may do 100 % financing - but Owner second is better choice.

    B You mistakenly assume $ 100K equity - cash out when you refinance. If it appraises at $ 500K and you get get 80 % Loan ( $ 400K ) -- you pay off $ 320K - so you get only $ 80K minus closing costs -  some times closing costs can be added to the loan.
    yes - you will still have $100K equity but not cash in hand.

    C   You need to get vacant unit rented out -- increase rent by 3 % or 5 % on all units and increase cash flow-   wait two or three years then refinance - value may be $ 550Kand get more cash out --- 

    D   If cash flow is good - you can also get a Co Signor  or private Investors - like
    doctor or lawyer from your area - as silent partner - and some abnks may do 100% cash out loan --  you have to give up some equity to partner ..also I suggest let the partner have all the  tax write off -- have a good CPA --

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  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Champak Shah Thank you. So to be sure let me see if I'm understanding what your saying, I might sound like I'm repeating myself or others,  but oh well better safe than sorry. 

    A  So what you meant by owner second is better  was to have the owner seller finance the 25% at closing as a second mortgage  if the lender approves for a second mortgage . This would cover the 20% the bank wants and the rest for closing.

    B only 80% ltv and maybe closing cost added but if  not only 80%  minus what closing would be.

    C I understand

    D what would the co signor bring to the table?

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  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Doug P. Absolutely Im studying now on how to analyze a deal and submit an offer after I get it appraised. I know not to pay market value and to make sure I leave equity. Is there a certain percentage you would suggest to leave. 

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  • Doug P.
    Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    @Joseph King It depends on what the property needs in the way of repairs, what you're exit strategy is, and what your financing strategy is.

    Obviously if the property doesn't need any repairs then you don't have to deduct those from your offer.

    If you plan on flipping the property then you need to deduct your profit from the offer. If you plan on renting you don't necessarily need to deduct an immediate profit (although it never hurts to get some more equity in case your plans change.)

    And finally your financing. If you're getting seller financing or buying sub2 then you can offer a lot more than if you have to get bank financing or private money.

    I'll give you a couple of examples to think about:

    Example #1 - Classic BRRR

    After repair value (ARV): $500k
    Rehab costs: $100k
    Maximum allowable offer (MAO): $300k

    $300k is the absolute maximum you can pay for the property because $400k is the most you can refi out, and you need to pull out the $100k in rehab costs as well.

    This strategy needs a partner or a HELOC or something to get you started but if you can keep finding good deals there is basically no limit to the number of units you can acquire. Also as your tenants pay off your mortgages you can accelerate your purchasing by using the equity in your existing properties.

    Example #2 - Classic Sub2

    ARV: $500k
    Rehab costs: $0
    MAO: $450k

    In this example you are taking over the payments on an existing mortgage. You don't need a partner or HELOC. You do need a seller who is motivated by debt relief, and it's a good idea to buy properties that don't need any repairs.

    This is the type of deal I've been doing for the last 16 years. Normally I set them up where I will pay the seller's mortgage for 5 years and by then I've accumulated enough equity to refinance at 75-80%.

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  • Champak Shah
    Stone Mountain, GA · Member since 2010 · 267 posts · 72 votes
    10y

    *****  I forgot to mention - Hard Money Lenders - will NOT do 80 % loan (purchase price ) - for first timer - and with one unit vacant that needs repairs. Unless NET   cash flow is good from 11 units -  rate will be higher and several points.

    ******   Seller finance - second is better and cheaper- No points and  low- market rate interest and longer term - say 5 to 10 years.

    *****  co-signer brings his good credit score over 800 or 850 plus have good income - say $ 250,000 per year - which will allow for 100 % financing.  
     More over - if he likes 10 % or higher return and tax write off - he will be a silent partner for next 3 or 5 properties and you will be Millionaire (on paper ) in less than Five years ..  if you learn how to find properties and negotiate a good deals - every one wins. many older apartment owners want to retire with steady income - i.e. second mortgage payments.

       Once you ahve three or four - then next one you can buy on your won - with seller finance - without co-signer unless it is bug property.

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  • Champak Shah
    Stone Mountain, GA · Member since 2010 · 267 posts · 72 votes
    10y

    ****  If you own a house and have $ 80K equity - you can give seller a second mortgage on your  house - so that you will have more equity in apartments -- after repair and rental of one vacant unit - Refinance and get more cash out - for other investment.

    1Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Champak Shah Thank you, I will definitely be trying that strategy 

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  • Robert GuilfoylePro Member
    Mount Laurel, NJ · Member since 2012 · 125 posts · 36 votes
    10y
    Joseph King Try Penfed Credit Union. They have 10 yr balloon mortgages with 30yr amortization. Navy Fed only offers 15 year with 15 year amortization.
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