Is Zero money down a smart move?

21 Replies

Hi Folks,

I'd love some feedback as I'm going through the motions for my first property and I'm not sure the best route to take.

I'm involved in a loan program that, if I wanted to, could put ZERO money down on a multifamily property. I would be living in one unit and renting out the others. I have been running the numbers on all the properties in the 700s for tri/fourplex and none are cash flow. Ill be be paying 800-1500 out of pocket.

I'm in LA, it just isn't happening at my price point. So here is my question.

Should I buy a tri/fourplex for $700-800,000 with zero money down, then buy an investment property elsewhere (probably long distance) with the money I had been saving for a downpayment? 


Should I put that money toward the down payment of the multi family to reduce my overall mortgage? Its only 50,000 grand so the downpayment doesn't affect my mortgage all that much.

What do you think? What other info is needed to make the best choice here?

Thanks In advance


Hey @Jonathan Taylor , it's tough to give positive advice on something that costs so much and doesn't cash flow. It really just depends on what you can afford to pay every month. Have you considered Vacancy, Maintenance & Repairs, Capital Expenditure, and Management costs in these numbers? Because that could really kick your butt on such an expensive property if you haven't considered those. 

What would you do with the $50k if you don't use that as the down payment?

@Nate Burgher

The final costs includes 5% vacancy, 5% repairs, 10 % management (although Ill be living there and managing the first few years) just REALLY hard to justify negative cash flow at that high cost. 

Rents would get me 3900 give or take and my costs are 4450. So Its not a HUGE loss but not cash flow so any big expense would wipe me out. 

I was going to put the 50K in a long distance cash flow property to offset the loss on this one. 

Again, not sold on this method as its risky at my early stages in REI.

You are not really investing since you will be depending entirely on appreciation to gain a profit. Whether you do or don't use a DP is irrelevant since you will not change the negative cash flow.

Yours is a personal decision as opposed to a investment decision.

 with 50k it's going to be hard to cash flow much using a property management company out of state.YYou have to live somewhere. If you use that money towards for the multi, will it allow you to live more cheaply than your alternatives? Could you cover the costs with 2 vacancies for at least 6 months?

@Jonathan Taylor , sounds like you just answered your own question. It's risky, it's a lot of money, it's negative cash flow. You're basically saying it doesn't sound like a good idea, especially for someone that is new(ish). If you like the long distance one and you're comfortable with that one, do that instead. You don't want to be stressing about your property. You invest with money that you don't need. Sounds like you're trying to go too big, putting yourself in a negative situation. But as @Thomas S. said, sounds like a personal decision.

@Jonathan Taylor I think you gotta trust the gut a little when it's telling you it feels too risky. Is the negative cash flow you're showing with all units rented out or with you living in one? I would be very iffy if it was negative as is. Could you raise rent or add value to them? Even so it sounds really risky.

@Thomas S. You are correct. Its either throw money away on rent or get into a not-so-ideal situation here. 

@Jill F.  The cash reserves would supply me with time and a cushion if anything went wrong for 6 months. And it would be cheaper than my current situation but not by much.

@Nate Burgher I agree. From thinking this out, I think its not the best choice. Its just the struggle of living in a crazy expensive city. This market is not for newbies.

@Yader Gomez yes, those numbers are fully occupied WITH me in one of the units (2 units rented, me occupying the third). The units are actually decent, some minor upgrades would be needed but no value-add that I could see. 

I don't think it's as bad as some people think since you will be living in one of the units. Owner occupied MFR's are often cashflow negative. It's rare to be able to 'live for free', with a triplex and have your remaining two tenants cover your entire payment, this is especially true with a 0% downpayment program in a very expensive market, often times it's just 'living for cheaper.' Remember to compare apples to apples and don't try to compare the negative cashflow of an owner occupied MFR at 0% down with that of a true investment MFR with all of the units rented and 25% down.

The missing piece is opportunity cost, since regardless of what you option you take you will still need to provide a roof for yourself. If you don't buy this, and chose to continue renting instead how much would you throw away on rent every month? I'm assuming you would be paying roughly 2k/month in rent, as that is what you are charging for each of your units that you are analyzing. 

If you are living in a crazy expensive city such as LA, and have the option to provide housing for yourself by paying only 800-1500 / month, while slowly gaining equity and possible appreciation, all while using none of your own money to fund the deal, then that should be an easy choice.  I would keep the remaining 50k of savings in a liquid investment that is semi safe as your emergency rainy day fund and continue to save and add to it as rapidly as you can to lower your risk.

Being cashflow negative 800-1500 isn't a bad thing if it means you are able to cut out 2000 worth of other expenses, it's called winning!!

@ben zimmer you bring up great points and I see what you’re saying. Thank you very much for your analysis and it looks like I should just ask How Can I afford places like this and not ‘I cant’.

@Jonathan Taylor , how is it that you're "involved in a loan program that, if (you) wanted to, could put ZERO money down on a multifamily property"? That seems iffy to me.

ie. Is it them who are suggesting (read: selling) specific tri/fourplexes?

And/or, is it them providing the finance (at what rate/terms/balloon)?

Get where I'm going with those questions? [ie. They'll only show: what they want you to see!]

ie. How will you ever find bargains/great-financing-terms through them?

ie. Any equity will already have been sucked right out of the deal!

But, I do believe Ben's point is worth repeating: "Being cash flow negative 800-1500 isn't a bad thing if it means you are able to cut out 2000 worth of other expenses, it's called winning!!"...

@brent Coombs I totally agree. When I first started the application process I was very skeptical.

It’s a NACA loan (neighborhood assistance corporation of America) and they offer no downpayment if you want to but they approve you off of what you can afford each month based on your financials. So if you have money for a downpayment, you can.

Also, they do not put you in properties. I’m working with a realtor who is searching for what I’m looking for. NACA is simply my loan officer and under writer backed by Citibank and Wells Fargo.

So I can buy points down, buy down the principal or simply not put any money down on a 30 yr at 3.8%.
I understand that initial WTF moment as yes, it sounds sketchy but as I learn more about the program it’s checking out.
Thanks for the concern.

I’ve always viewed putting money down as buying cash flow. My goal is to CREATE cash flow so putting as little down as possible is always my goal. I achieve that by using seller financing and have done deals as large as 12 and 16 units this way.

Another point I like came commercial investor, Ray Alcorn. He stated something like, your goal is to get all of your invested capital out of a deal ASAP and the less you have in it, the easier it is to get it back.

No money down can be smart but not if it means sacrificing the price you are buying the deal at.

What will the property clear if all 3 are rented without you living there? I assume you only have to live there for a year like most owner occupied loan rules.

Two other points to consider: Equity paydown, and depreciation. Every month, how much equity are you paying down on the place? Also, if you make under 100k MAGI, you can deduct up to 25k in passive loss against your W2 income. This deduction phases out up until 150k MAGI. This should not be your only justification, but it is something to consider.

30 years at 3.8% is the best you will get, interest rates are projected to get closer to 5% towards the end of 2018, which has a large effect on your monthly payment. If it makes sense, locking in at 3.8 for 30 years is a good call.

@Jonathan Taylor I agree with @Ben Zimmerman . You have to take into consideration opportunity costs. 

Depending on where you live in LA rents can be much higher than 2k a month. 

We were renting in Burbank, California for a year a 3 bed 2 bath house, around 1700 square feet for 3900 a month. We then bought a 2 bed 2 bath, 1400 square foot house for just under 800k. We had to put a 160k down payment and our house expenses are about the same, but this property has a guest house in the back that we rent for $1500 a month.  So we lowered our expenses by about $1200 a month and we  gain about $900 a month in principle pay down.  The house has also appreciated by about 50k since we purchased it last year so that should cover closing costs when we sell and it will likely continue to appreciate for a little while longer.

If I were in your position and could have purchased with zero down, I absolutely would have done that, especially if it were to lower my monthly expenses and paid down my mortgage. I would then keep 10-20k in an emergency fund for the house in case I needed to fix anything or my tenants moved out and I had to cover the payments on my own for a few months. I would then invest the other 30-40k in either a cash flowing property or partner with another investor on flips.

@Jonathan Taylor A side note on $0 down loans, whether NACA, USDA or VA. Seller's often worry - and rightly so - that the buyer has very little skin in the game.

Let's say that you make an offer with the customary (at least around here) $500 EMD. 3 weeks into underwriting, you spot a much better deal.

You could walk away for $500, because the way the P&S is written (again, at least here in MA) is that the sole remedy for buyer default is to forfeit whatever deposits were made.

Now the seller's property is stigmatized.  It was under agreement and the deal blew up.  The pool of buyers who were interested 3 weeks ago have, for the most part, moved on.  

It goes back on the market, racking up more days on market.

In the meantime, the seller most likely has another property under agreement, so he's under pressure to accept an inferior offer.

This $0 down buyer has really screwed the seller.

Not saying that you shouldn't go with $0 down.  Just be aware that a sharp agent will alert the seller to the risk.

@Jonathan Taylor Welcome! According to your numbers you will be paying $550 per month and accounting for %10 property management. You stated prop management will be you first few years so you are paying $160 basically. At any rate $160 or $550 is an amazing price to pay in LA. AMAZING!!!!!! Save your 50 k, repeat "save your 50 k"! I am sure you have good credit so dont panic if a cost comes along, you can always finance heating/cooling etc plus you have 50k. Good luck and keep us posted.

@Jonathan Taylor you are not taking into account your living expense. If you are buying a fourplex and renting three units for $3900, that is $1300 per unit. If all four units were rented, it would be $5200 on your costs of $4450. 

Essentially you are able to live in the unit for $550 per month with no money down. That leaves $50K in your pocket that you could hold in an emergency fund. Run the math on it, the $50K could cover your $550 short fall for 7.5 years. 

I would argue that buying a cash flowing property in another market, only to turn around and pay $1300 in the market you live doesn't make sense. It is way better to self manage something close than do some turn key in another state.

I would buy the property with $0 down and hold on to the cash for six months. Six months is enough time for you to feel learn the ropes and feel comfortable about expenses. At that point, keep $20K in reserves for CAPEX and vacancy. You can use the other $30K to shop for another property.

I am not a fan of negative cash flow, but if you take into account $0 down payment and you are living there, it changes the match considerably.

Do I understand correctly that if you moved out and rented your unit it would cash flow positively?  Even with no money in it?  Therefore, if you had to move for some reason, you would not be forced to sell?  Well for cryin' out loud, buy it!  Oh, and keep your $50k.  You will probably find something that needs to  be fixed within the first year.  It always happens. 

The tricky thing will be having your neighbors as tenants.  Be very picky who you rent to.  Buy lots of books and join the local landlord association, because the laws are tricky in California.  However, you will have more rights as an owner-occupant than you would otherwise.

@Jeff Brower When I move out the property will cash flow and I am seeing those trends in interest rates.

@Shiloh Lundahl thank you for sharing, even though rates and costs are high, they will be higher later. I agree

@Charlie MacPherson good point. I'll bring this up with my agent and see what she says.

@Dylan Vargas Thanks! Ill keep folks posted how it goes, as what Im learning is head knowledge and will apply it to the real world

@Joe Splitrock Good breakdown. Thanks

@Amy A. You are correct but a caveat of the loan I would be purchasing it with requires me to live at the property. So WHEN I move out I would have to refinance to retain ownership. But either way, I am seeing that this angle will work if the numbers work out. 

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