Is No or Low Money Down Too Risky for Buy and Hold?

Question

Hi BPers,

Generally it is well accepted maxim in BP that any buy and hold investors should have a reasonable amount of reserve for our properties just in case something goes wrong.

With that in mind, wouldn't buying rental with no/little money down be too risky as well? BP has now published a book on this. I haven't gotten it yet, so I cannot tell if the book covers the risk mitigation for this strategy. I can understand how a flip may work well between a sweat partner and a money partner. But for a buy and hold?

Jeff S. · Answer

@Ezra Nugroho how would that be risky? The less you put down the more cash you have. That is less risky for you. If you are able to walk away for some reason (think sink hole) and the bank doesn't come after you then you have less to lose.

It is risky for the bank. It is risky for whatever investor has loaned you the money because the less skin in the game the buyer has the higher the possibility you would give up if things go wrong.

Bill Sargeson · Answer

I don't believe in "buying" cash flow through a larger down payment, getting great deals is how I get my cash flow.  I use the same strategy as Elizabeth  Colegrove I go in with as little as possible....keep my cash in the bank....I love leverage and OPM(other people's money).  By doing this I keep my money and that allows me for very high reserves in case something happens and I sleep very well! :)

Elizabeth Colegrove · Answer

We have done it 3 times over with 0 to 5% down. 2 houses with 20% down. I buy depressed houses  with as little in them as possible. My goal is for the tenants to pay them off. At the same time I do not refinance the houses to pull the money out. While I don't put alot of money into the house, I let the money stay in the house as we are in it for the long term.

Larry Turowski · Answer

@Ezra Nugroho Let's not forget the deal.  It has to be a deal.  It is not just about buying with little or no money.

I do not exactly buy with no money down but I have bought a couple of properties for cash that I rehabbed and refi'd out of for more than I had into them.  I only did this because I knew I could sell them for more than I had into them, and I knew they would cash flow.

The same would be true of other no-money-down strategies.  It would still have to be a deal.

Jerry W. · Answer

@Ezra Nugroho  actually the less you put down to buy a property the more you have left in the bank.  reserves are important.  The trick is cash flow.  If the property will make you positive cash flow with the entire thing financed it is a good buy.  I love no money down deals.

Brian Gibbons · Answer

Brandon that's awesome because if you focus on owner financing and get a good repetition for paying on time then you get testimonials from people that like and trust you which goes along way to getting more business think of getting video testimonials on the website that they're happy with your payment history and they like the way you do business

Brian Gibbons · Answer

Hi @Brandon McCombs

You used OPM.

OPM includes IRA loans, JV Partners, Family, etc.

Nice job.

Joe Villeneuve · Answer

No Money down refers to where you spend your cash...not how much cash you have.  It's a reference to "How" you use your cash, not how "much" cash you have access to.

On top of that, the cash reserve doesn't have to be your cash...or even cash for that matter.  It could be a "cash like substance".

Joe VilleneuveREcapSystemA2REIC

Bill Gulley · Answer

The amount down has little to do with reserves, you seem to be saying no money at all to put down or have in reserves, yes, that could be a real problem. What you put down effects the cash flow, but risk to you isn't really more to what it rents for, vacancy and paying its own way.

I have not read the book yet, I have it, but I'm sure Brandon didn't get into risk management with leveraging, that's a tad advanced for residential I'd think. Long ago I picked up a few where I kept my fingers crossed that nothing major happened and it worked out each time. If the major items are in good shape and you get an opinion from an inspection, chances are you won't have a big issues within a year, consider how old the place is and what it is. But, yes, you should have reserves.

Boils down to, how well do you sleep? LOL

Joe Villeneuve · Answer

I know.  When I'm speaking on it...it gets the audience's attention.  LOL.

Joe VilleneuveREcapSystemA2REIC

Is No or Low Money Down Too Risky for Buy and Hold?

Most Popular Reply