Ben Leybovich says that making down-payments is not smart – thoughts?
Investor · Saint Paul, MN · Member since 2014 · 73 posts · 11 votes
Ben's latest article suggested this and he thought it would be a good forum post to check out what other people think.
Check out his article, it's a good read. http://www.biggerpockets.com/renewsblog/2014/09/02...
Send out your thoughts / strategies!
Ben told to me to ping you @Brandon Turner
Okay....I'll take the bait.
Assuming that "nothing down" financing is best solution for all is, at best, myopic. Waiting around for 1 deal a year to avoid making down payments on other good quality product is biting off your nose to spite your face. That is like trying to minimize taxes instead of maximizing after-tax profits.
The best way to finance more product is to learn how to raise and organize money. It really astounds me that so few real estate investors take the time to learn this craft. If your trouble is finding enough money to finance your deal flow habit it stands to reason that you may get off your duff and learn how the securities laws work instead of searching to the end of the earth to find some creative scenario to limit dollars into a transaction.
There are also tight markets where exotic seller-financed transactions don't work. Lenders will like these markets, but you still need to find the last 10-20% of the capital stack from somewhere. For many larger deals that produce solid cash flows it would be tough to have them continue to cash flow with a higher DSCR. Saying that putting these down payments into said properties is dumb is, well, dumb itself.
People would be far better off learning to raise money and do more deals with bigger numbers. I would argue there has probably never been a better time in history to do this than right now. We have BOTH FNMA gov-mint coked-up financing AND the ability to generally solicit for investors. Try finding a time any time before now when investors had both of those arrows in their quiver.
Quit spending inordinate amounts of effort doing Jedi mind tricks with sellers, cash-out strategies, etc. and learn the securities laws. There is a MOUNTAIN of money out there from people sitting idly in accounts. Title III will be implemented soon. State securities commissions are passing non-accredited investor rules to allow you to sell them securities to fund all the 10 or 20% down payments you'll ever need on <gasp> inferior product that *only* cash flows well and is not one of the blue moon investments that comes once a year. Your goal should be to maximize cash flow, ROE, etc. along with the assets you manage and to minimize taxes. The goal should not be to minimize cumulative down payments.
Now go get off your a$$ and learn to raise money and stop trying to find The White Whale.
As a newer member... I'm not seeing it clearly.
How are you getting this 100% financed? If I start calling lenders right now to buy a duplex for $180,000.00 with 0.00 down; I'm under the impression there will be laughter.
There are a lot of ways George that is true you might get laughter if you call traditional lenders, but some ways you can are:
- seller carry / seller financing
- Buy at 75-80% of market value from auction/TD sale/etc with 20% down then cash out refinance back out all of your down payment and contributed funds after initial closing with regards to residential
- on Multi's you can create cash flow and buildings make a multiple of that net cash flow. For instance 8 Cap sells for 12.5x of NOI (net operating income) so if you can increase NOI by increasing income or decreasing expenses you can increase the value and lenders will lend you based on that new value with sufficient documentation and time allowing you to pull all of your money out of the "deal," and in essence you have an "infinite," return or 0% money in the deal.
- etc
I appreciate the reply. Even your description however, you are talking about pulling the money back out of the deal later (this may answer some other questions I have).
With the options you mentioned, it's still obviously an overly blanket statement that isn't really being backed by detail (whatever the CFFU is apparently explains it? :-)
I would love to 100% finance my first duplex; and as much as I have been reading about financing options, nothing has led me to believe I can avoid the down payment.
Experts prove me wrong. It starts to sound like a late night tv commercial with all of this 'creative solutions', 'oh you just have to know how silly'. Next you'll be telling me it's a mindset.
Believe me, I'll always go for seller financing; but how many sellers are truly interested in this? (Tips on convincing them are welcome)
Also, my apologies for being the noob bursting in on what was obviously a statement for at least intermediate investors.
@George Frick - I think you are missing something, my friend. It's not our job to "prove you wrong". You came here to learn - so, learn! I, for one, am much too busy to take the time to argue with you. I teach people to think, but you know what they say about a horse - you can lead it to water, but you can't make it drink :)
In this thread alone, several strategies have been put in front of you. Extrapolate meaning and search for answers, or don't.
Here's one last thing to chew on:
Every deal I've ever done had required a down-payment. Sure - that's normal. However, assumption that just because it's required, that you need to do it is kinda ridiculous...no?
What is customary and what is possible. We discussed various down payments. What is possible is anything creative as possible. Thanks finance it has to do with perhaps how can we solve a problem for the salad. Let's say you asked the question Mr. seller I know so my business but you be really helpful if you just told me why do you need the money? What if they had outstanding medical bills of the head? What if you assume that? Couldn't that avoid down payment interview with cash flow to pay those medical bills or to negotiate them for a discount, perhaps a severe discount
I am willing to bet that Big @Ben Leybovich is loving this thread :) He lives for this! I happen to be a purchaser of Ben's CFFU and he's the real deal.
Even in my own deals now, I'm trying to figure out ways to have as little of my own money in the deal as possible. The only way to do this is to be able to provide value to everyone else that is involved (institutional lender, private lender, cash partner, seller even). It's amazing what you can do when you learn the right things and can get creative.
Looks like Ben Leybovich started a cat fight - again...and it wasn't even my post. Love it! Even @Bill Gulley - thank you indeed. I see you changed your profile picture...you are no longer a self-assured tanned boy in shades, but a happy in love success story. She knows you're getting smart (and you are). Thanks for the kind words, Mehran!
Perspective - people; perspective defines success...
OMG I did this previously on an IPHONE!
What a confusing mess!
What I meant to say...
What is customary and what is possible.
What is customary is down payments.
What is possible is anything creative.
Creative finance has to do with perhaps
"how can we solve a problem for the Seller?"
.Let's say you asked the question
"Mr. seller I know this is NONE of my business but it would be really helpful if you just told me why do you need the money? "
What if Seller had outstanding medical bills to pay?
and...What if you assume those?
Couldn't that avoid down payments if you took care of those medical bills?
You could negotiate them for a discount, perhaps a severe discount of 30% to 50%.
Or pay over time.
Hahaha - I knew what you meant to say before you said it, @Brian Gibbons :)
Call me some time; let's catch up.
Interesting thread! I will chime in and say I have done true no money down deals in the past. Twice. In both cases they were construction/perm loans from different local banks that does portfolio loans. So, it is possible. It isn't common, but it does happen.
It's basically overstating the value, Enron accounting so to speak, gurus use it all the time. I'm buying a 100K home, it's market value (set by me) is 100K, I actually buy at 80K and get a loan at 56K from Mr. Banker, I have funds to verify my down to close. I then get 24K loan from granny Smith, I close, the bank takes a first, my money is replaced by granny and a second is then filed. There are other ways as well, but they all boil down to overstating the market value using the seller or others in the financing. No property is really worth more than it's sale price if the sale meets the definition of market value.
Can you find distressed sale prices? Sure, they are rare, but out there. Goggle the definition of market value of real estate, it might be here as well, I have commented before but I don't recall mentioned every aspect. If all the factors are not present, then a price is distressed and there is a reason for that as well, marketing, condition, location, many factors may be applied. That's to say that obtaining a property at a distressed value that holds some basis for a lower price that can be easily cured is rare.
There are basic principles of economics 101 that can not be circumvented in real estate, those points are made in the basics of real estate which many investors skip past because they don't seem to effect today's ability to make a buck. They are wrong.
Again, no idea what Ben has, not going there. :)
Okay....I'll take the bait.
Assuming that "nothing down" financing is best solution for all is, at best, myopic. Waiting around for 1 deal a year to avoid making down payments on other good quality product is biting off your nose to spite your face. That is like trying to minimize taxes instead of maximizing after-tax profits.
The best way to finance more product is to learn how to raise and organize money. It really astounds me that so few real estate investors take the time to learn this craft. If your trouble is finding enough money to finance your deal flow habit it stands to reason that you may get off your duff and learn how the securities laws work instead of searching to the end of the earth to find some creative scenario to limit dollars into a transaction.
There are also tight markets where exotic seller-financed transactions don't work. Lenders will like these markets, but you still need to find the last 10-20% of the capital stack from somewhere. For many larger deals that produce solid cash flows it would be tough to have them continue to cash flow with a higher DSCR. Saying that putting these down payments into said properties is dumb is, well, dumb itself.
People would be far better off learning to raise money and do more deals with bigger numbers. I would argue there has probably never been a better time in history to do this than right now. We have BOTH FNMA gov-mint coked-up financing AND the ability to generally solicit for investors. Try finding a time any time before now when investors had both of those arrows in their quiver.
Quit spending inordinate amounts of effort doing Jedi mind tricks with sellers, cash-out strategies, etc. and learn the securities laws. There is a MOUNTAIN of money out there from people sitting idly in accounts. Title III will be implemented soon. State securities commissions are passing non-accredited investor rules to allow you to sell them securities to fund all the 10 or 20% down payments you'll ever need on <gasp> inferior product that *only* cash flows well and is not one of the blue moon investments that comes once a year. Your goal should be to maximize cash flow, ROE, etc. along with the assets you manage and to minimize taxes. The goal should not be to minimize cumulative down payments.
Now go get off your a$$ and learn to raise money and stop trying to find The White Whale.
Books on raising private money and syndications below
Please read Bryan Hancock's and
@Brian Burke s posts,
they are absolutely fantastic on syndications and private lending.
http://www.amazon.com/Maverick-Real-Estate-Financi...
http://www.amazon.com/Maverick-Real-Estate-Investi...
http://www.amazon.com/Principles-Real-Estate-Syndi...
http://www.amazon.com/Secrets-Syndication-Money-Ot...
One point needs to be clarified in this thread: not making a down payment and 100% financing are not necessarily the same thing. They can be, for example when buying a property subject to the existing financing and giving the seller nothing, just taking over the payments. In this case, no down payment and 100% financing were both achieved.
That's the "once in a blue moon" deal. Are they out there? Yes, but you'll spend a lot of time looking. Do they serve a purpose? Yes. A new investor that doesn't have money for down payments and doesn't have the track record to successfully raise money from investors can be well-served by this type of deal, if successful. You have to be very careful about over-leverage, however, and don't do anything dumb just because you can.
You can also make a down payment AND get 100% financing at the same time. It's called syndication. You get a bank loan just like any conventional transaction, and you raise the money from investors to make the down payment. You and your investors split the profits (or losses). It takes a track record to do this successfully, unless you have friends and family that will fund your early deals. To you, this is 100% financing. To the bank, it's not.
Follow @Bryan Hancock 's great advice above and learn how to do this legally, and you won't have to wait for the "once in a blue moon" deal. You just have to find above average deals that leave enough meat on the bone for all to share.
Nice - we got both @Brian Burke and @Bryan Hancock in this thread.
Now boys, don't give away the farm...I am a guru after all; leave some knowledge for me to sell please LOL...LOL
Mr. Burke - like that?
Both @Brian Burke and @Bryan Hancock have a proven track record in "OPM" or using other people's money.
There are "4 Legs of the Stool" in REI.
The four legs of the stool include:
One: finding sellers. To keep this conversation simple, you're looking for sellers that generally are motivated and have a problem. The three kinds of houses for real estate investors are pretty houses with equity, pretty houses without equity, and ugly houses that have equity. Ugly houses with no equity really have no value to the real estate investor. Your marketing should pinpoint each one of these three types of sellers.
Two: finding buyers. Keep this conversation simple, you need to find wholesale buyers, retail FHA conventional buyers, and owner financing buyers for rent to own or owner carry.
Three: finding funding with partners, private lenders and hard money. This is where OPM and other people's money comes in.
A JV partner will be a credit partner or money partner. An example would be a JV partner to put up capital to purchase and to rehab, and be paid back all expenditures and expenses, including holding costs and sales costs. If the deal is purchased, rehabbed, and resold, then the net profit would be split somehow. Does not have to be 50 50%.
Private lenders, this is where someone would act as a bank, usually using their IRA money. A custodian such as www.Trustetc.com is usually used to prepare the paperwork for what's called a self-directed IRA. Let's say you found someone to let you $10,000 from their IRA. They have $100,000 in mutual funds with their stockbroker. They would contact the custodian to create a self-directed IRA, and direct their stockbroker to sell $10,000 worth of mutual funds. The $10,000 would be transferred to the custodian. The custodian would then draft the paperwork to lend to you the real estate investor. It's called the private banker concept. The private lender would receive interest. The IRS has rules re: self directed IRAs, notably Title 26, Section 408A, and Section 4975,
Hard money used to be easier. You used to be able to get a 65% loan-to-value loan, interest-only, with a one-year call. You used to be able to get a hard money loan with no "skin in the game", meaning that you didn't have to have any money in the deal. Now hard money lenders want sure things. Credit is tighter, so selling the property retail is harder and slower. Many hard money lenders want experienced rehabbers that have a good track record.
Four: centers of influence. A good real estate agent or investment advisor be properly trained in centers of influence marketing. Think about "who knows a lot of people that can refer you business?". Some people to come to mind are people that know a lot of people and they know their financial issues. Chamber of Commerce president, Rotary club president, financial planners, small bank managers, all of these people know a lot of people in the financial issues. Joining clubs and giving speeches helps get warm leads. Center of influence marketing really helps your business.
So no matter what your REI focus is, whether it's single family houses, multis, small apartments, mobile homes, etc. every day when you get up plan your day, think of the four legs of the stool.
Ask yourself daily, how can I get more sellers, more buyers, more funders, and more centers of influence for my REI business?
Who would want to make a down payment if they didn't have to? Not me, not anyone.
That does not mean that you will be able to go around buying up property after property using no money. You will do very few deals if you wait for the grand slam.
@Ben Leybovich has stated himself in multiple bp posts & podcasts that he only does about a deal a year. He waits for these deals. That is his strategy.
the question is. Is it your strategy?
Any deal I can do I am going to do it with as little money as possible. However, i'm not going to sit on the side lines and watch solid deals pass me by every single day while waiting for the Grand slam to win game 7.
For me, it is about volume.
Great post & comments here you guys! Lots of helpful information here for me to soak up as a new investor. I took down a lot of notes.
I have recently been racking my brain on how to structure financing deals I come across in a creative way like discuss here.
This is by far my favorite forum I've come across here on BP.
Thanks
Nice, @Jay S.
Glad we can help!
@Account Closed That's the point - isn't it? If the deal is not strong enough to finance fully, then it's just not good enough. We don't buy equity or Cash Flow - we create them, @Konrad Lightner . Are you seeing this more clearly now?
I agree. If you read Ken McElroy's ABC's of Real Estate Investing, that is the #1 myth that he addresses. You don't need to plop down a down payment on a deal. A deal should be so good that investors will be lining up to be a part of it. And he is talking about getting a $9 million apartment building and not putting a dime of his money into the deal! He gets 10 % equity and when the building goes up to $11 million and they refinance, he pockets $200,000 because with real estate like that, the operations and cash flow determine its value. I agree completely and that is probably what I desire to target. Just focus on finding good deals and running numbers showing that it is good cash flow and create the opportunities instead of looking at "for sale" signs or craigslist ads. I recommend his book and it is a great read. Opened my eyes to a lot of things.
I've been reading more of this forum post as creative financing and no down-payments interest me. One, I have no money for a down payment! Two, for those who have money, I tend to think of deals with down-payments and turn-key rentals as "low hanging fruit." If you have the ability, you can walk in to a bank and get a conventional mortgage easily and start cash-flowing immediately. The really good deals take time and effort as @Ben Leybovich points out, as he only has done one deal a year.
So it is a matter of how quickly and immediately do you want a deal? They are easy to get with money down. But if you wait and look and be patient, you can get truly amazing deals with no money down, utilizing OPM, having a smaller share in more properties than a huge share in just one. I go back to McElroy's book, I would rather have 10% equity in multiple big properties than 100% in one property where everything is on the line. I think multi-family units and apartments could be the way to go for me, if I put the effort and time in to studying cash flow operations and creating opportunities. I will have to study more on this, but it seems this strategy could be really promising for me. But also, each person has different situations and circumstances. So it seems finding the right strategy for the person is key. Like @Ali Boone says, find what you enjoy doing and do that. Don't force yourself to do something that you are not designed and have no desire to do.
Right, @David Horton . And, for the record, I am not so much opposed to down-payments in and of themselves. What I take issue with is when a deal does not work with out one, in which case the DP simply buys CF/Equity. We don't do that in my world, and by the sound of it, in yours as well :)
Right, @David Horton . And, for the record, I am not so much opposed to down-payments in and of themselves. What I take issue with is when a deal does not work with out one, in which case the DP simply buys CF/Equity. We don't do that in my world, and by the sound of it, in yours as well :)
That makes sense, and hopefully it will be my world! I am in the planning and learning stage, drafting a plan and vision. Thank you for your insights.
@David Horton Nice relay of my favorite mantra! :) (it really is true too)
No matter what anyone says, you need to have a good chance at appreciation. Forced appreciation is paramount, make sure you are getting a very good deal well below market. BE PATIENT. Unless the cash flow is off the charts, don't invest for cash flow unless your local market can go up when the general "market" is going up.
Do you have documented proof this tactic has been done? LTV 125% No local bank will do such a thing with out collateral
http://www.loanexpo.com/
Mo money!