Does No-Money-Down Work...?!

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Does No-Money-Down Work...?!

Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

OK.  So - unless you live under a rock, you've by now listened to Podcast 108 featuring Grant Cardone.  If you listen between the lines, and you don't have to dig too dip, Grant has nothing particularly nice to say about the no money down strategy.  He makes this point of view known elsewhere as well...

Since you absolutely can't argue with Grant's success, and he absolutely must be taken very seriously, where does this leave Ben Leybovich and @Brandon Turner who are notorious on BiggerPockets for nothing short of nothing down?!

My thoughts:

Grant is not so much trying to create income in RE, but to change the face value of earned income in his businesses to RE income, which is not only taxed lower, but Grant feels is more stable.  To him, RE is not a stepping stone - it is the destination.  All good by me...

Now - consider myself.  I've built a portfolio of multifamily which has allowed\s me not to work for a living.  I pursued the nothing down strategy because it was the only option - I am not smart enough to start businesses and unfortunately, while I was quite good at playing the fiddle, because of the MS diagnosis I was unable to pursue that career (not that it would have been a career capable of generating any serous revenue anyhow).  

Jump to today - my partners and I are currently negotiating on a 90-unit out of state.  This means a couple of interesting things:

1. This deal, if it grows through, will make me, and the investors, some respectable money.

2. I have partners, without whom I could not do this kind of a deal at this point.  Both of these guys have more money and units than I do today (though this is not going to last).

Both of them, I'd like to believe, take me seriously...  Why - because I've done a lot of ****, and I've learned enough to not do even more ****.  They think I am not stupid.  

Guess what - I got smart doing nothing down deals...

3. I've been using OPM for 8  years now, and if this deal comes through, I'll be floating a PPM of $1,000,000+; I will raise $1 mil from investors who agree with my partners in that I'm not stupid and know what I am doing.

Guess what - I got smart doing nothing down deals...

To me - nothing down is not a destination.  It is a stepping stone.  I am going to turn 40 in March.  I have a portfolio (all bought with nothing down) that has allowed me to do vastly better financially than any music student I went to college with.  It has allowed me not to work and focus on learning RE, and it has bought a margin of financial safety for my family which is better than any of my friends...even those earning high incomes...

And now, I have put myself in position to do much bigger projects, which, after a few years, will begin to cash out big.  At the end of this road, I will be able to retire with free and clear A Class RE with the money I parlay from my syndication pay days...

All of it was teed up by having the audacity to not listen Grant Cardone and go for it in the only way that I could - No-Money-Down!

I've built a small business in RE.  Now, I am growing that business into an empire by re-investing the dividends from the business I already have.  There is some money I can throw around now, but mostly knowledge is the biggest dividend.   

Thus - while no one can disagree with success, I'll take a stand.  I disagree with Grant Cardone - No-Money-Down does work.  However, in this strategy RE is not the final destination, but a stepping stone to bigger and better things.  I am the poster child of this...

Thoughts?

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Serge S.
Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
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I do agree with Grant. I'm not against NMD down but do not see it as investing in RE. Investing in RE is about wealth creation and preservation. When you invest with no money down you generally have nothing to preserve. With no skin in the game there is generally very little to no real cash flow if your calculating it correctly over the long term. Certainly there is no room for property management. As such, your simply creating yourself a very low paid job. Like the immigrants that buy a 7-11 and have to work it 14 hours a day to clear $30k a year. Maybe not bad for them but I would hardly call it an investment. As I tell @Ben Leybovich , why not cut to the chase and just become a property manager? The $100 per property managed will be more than your no money down deal without any of the risk and you are already a PM by default. I don't see "owning" RE as some sort of great privilege. Others want to tell all their friends that they are an "investor". To each his own.

I met a NMD investor recently with a small group of his followers at a local bar. He was bragging how he purchased a portfolio of D class junk from an old man for what amounted to retail value with NMD. He shared how much he would cash flow and how he was now a big time "investor" and created infinite ROI. The group was literally in awe as to how he pulled it off and feverishly taking notes. I felt sorry for him. He purchased nothing but perpetual liabilities with no chance of refi and has instantly become a property manager with no compensation. But at least he is now an "investor." That story will not end well for anyone except the old man that passed along his junk and converted it to real passive income, albeit probably short term.

Now, there is a time and place for no money down investing. At the bottom of a cycle when RE is out of favor like 2009-2011 I would have said buy everything you can regardless of how you buy it. No money down is very viable if you are buying equity. Buying a $100k property for $60k with no money down can be a strategy and you are creating some wealth. Buying someones junk that he can't sell in an arms length MLS transaction with NMD to hope to make $25 a month self managing ... now that is some nonsense. Just think about why your seller is willing to finance you his property instead of selling it outright. Show me a property in today's market that can cash flow anything material after paying 100% debt? Show me a seller today that will sell you his property for 50% of retail AND provide seller financing. How many units will you need to own AND manage to actually cash flow anything material and sustainable? Just save your money and buy a 7-11 if you want a low paying job that bad. Call yourself an investor and be done with it.

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  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
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    @Joe Villeneuve We're just going to have to agree to disagree here. I've seen too many NMD RE investors go bankrupt during the bad times for you to convince me that NMD is lower risk. I have simultaneously seen many people consistently put substantial money down and slowly build multimillion dollar portfolios over the course of 3-4 decades with little concern for whether times were good or bad. Some NMD investors can weather the bad times just fine. Some who put substantial money down will occasionally lose properties. However, over the long haul, conservative investing with substantial skin in the game is how I have see great wealth accumulate in my area.

    6Reply
  • Ben Leybovich
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    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Gregory H. - I don't think anybody would argue that there is a time and place for NMD. It is merely a foot in the door - a way to get started when there are no better options within REI or outside of it...

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  • Ben Leybovich
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    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Jay Hinrichs - I don't mean to suggest that floating a PPM is something special.  Not at all.  However, the intellectual worth required for playing at higher levels takes time and practice - it takes being in the game long enough to develop perspective and skills...

    My point is that my entry into the game, and as such my ability to be here now doing what I do, is a function of NMD - this was the only way to get it for me.  If it weren't for that, I wouldn't be in RE.  NMD is a tool, a facilitator, a stepping stone, and it works as such,  It does not necessarily work as forever and for everything...Nor should it

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Ben Leybovich 

      and I do not mean to down play at all the effort or skill it takes to raise money through a PPM offering.. I have done a few in my day and they are TOUGH TOUGH and I have a deep amount of respect for those that can pull them off.. The disclosure language which I call 50 ways to lose your money right there is enough to get the average investor to run for the hills..... And god forbid a PPM deal goes pear shape those are clusters when that happens.. . And its generally not the province of Newbies trying to get into the game you usually have to already have some deep contacts.. You have the advertising rules.. ( which of course are broken quite often) the accredited rules  etc etc.  But once you get that critical mass and have the clientele base then it just becomes another Ben Deal to the investors. Or it can be looked at that way.

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  • Ben Leybovich
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    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Jay Hinrichs - That "Ben Deal" - that's what I am working on now.  $100,000 - $200,000 sight unseen wire transfer for debt financing cause Ben is good - that's yesterday.  I'm just bored with that stuff.  NMD was good to me, which is why I react when my friends bash it. But, for me, now - in order to have fun and stay in this game, I just must grow...syndication.

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  • Ron Averill
    Investor · East Lansing, MI · Member since 2014 · 82 posts · 43 votes
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    I believe that risk is mitigated more by cash reserves than by equity. Regardless of the amount of equity an investor may have in a property, that property's equity is always in jeopardy when tough times hit. It takes adequate cash reserves to weather the storm.

    The lowest risk positions are either 0% equity (or as low as possible) or 100% equity, with adequate cash reserves in each case. In the first situation, there is hopefully cash left in your pocket. In the latter, there is greater cash flow that can be accumulated.

    The highest risk scenario is being anywhere between these two extremes without adequate reserves. More specifically, risk increases as equity increases until you reach 100% equity, when it decreases substantially (and cash flow increases). 

    From a risk perspective, I don't see any advantage in having 60% equity in a property while being short on cash. The upsides of leverage are also reduced in this case, so you get substantial risk without some of the best advantages of REI.

    However, getting to 100% equity seems like a very good long-term goal, especially when the accumulation phase of your plan is completed. Based on the above assessment, the snow-ball approach is a good way to achieve this goal.

    Thoughts?


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  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
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    @Ron Averill Cash reserves are definitely key. Obviously it would be stupid to put 20% down if that 20% completely drained your cash reserves. However, I disagree with you assertion that there is no advantage to having 60% equity. 

    At 60% equity you can maintain lines of credit which you can draw down on when in need. I have a friend who always maintains lines of credit on his properties once he builds up enough equity. When he saw the financial markets starting to seize up in late 2008, he maxed out a few of his lines and put $800K in the bank. It didn't matter what happened, he was set. Once the financial system stabilized, he just paid off the lines. In the wake of the financial crisis, the lines of credit have also allowed him to close on good real estate deals because he can offer cash for properties and close in a couple weeks.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
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    NMD...Many on here have used it, Myself included. It can be done, but it is not a practical long term plan to think you will never need to use your own capital.

    To build a portfolio large enough to generate some serious income you will eventually need to invest your own capital. Whether that be in the properties themselves or in serious infrastructure that allows you to be an operator working with partners bringing in the capital to buy these properties.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Gregory H. 

      those credit lines may have had PG's so if things really cratered bank would come after him personally...

    But I agree with you.. Equity in my mind is never a bad thing.. Cash reserves are MUST and are not talked about enough... in my day when I had over 100 foreclosure I was prosecuting on LA based Turn Key buyers who had leveraged to the hilt and had to reserves I became the proud owner of all those homes.. Of course we never imagined the train would run off the track and so far into the woods as what happened in 08 ... I mean I had done 2,000 of the same HML transactions over a 10 year period with nary a default then it became a cascade and those with no reserve's got wiped out. Those with substantial equity or paid cash weathered the storm much better.

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  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
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    @Jay Hinrichs They did have PGs. However, it only took his portfolio LTV from 40% to 60%. This is a class A residential portfolio in one of the top Philly suburbs (median household income $100K+). Things never got too bad there anyway, prices fell 10-15% and vacancy kicked up 1-2%. We'll leave the huge boom & bust cycles to Florida, Nevada & Arizona!

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  • Ben Leybovich
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    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Ron Averill - agreed.  Cash reserves - money on-hand.  This is why I finance 100% of the purchase and keep my money in the bank...

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
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    Originally posted by @Serge S.:

    I do agree with Grant. I'm not against NMD down but do not see it as investing in RE. Investing in RE is about wealth creation and preservation. When you invest with no money down you generally have nothing to preserve. With no skin in the game there is generally very little to no real cash flow if your calculating it correctly over the long term. Certainly there is no room for property management.

    Can't figure out what you mean here. No money down refers to low to no money down to purchase or control property.  The variables of purchase price and rental income are huge. Acquiring property with no or low downs has no bearing whatsoever on equity or cash flow.  "Skin in the game" has no bearing on equity or cash flow.

    2Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
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    @Account Closed 

    Also....what better example of "creating" wealth than by putting nothing into the deal to begin with!

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  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
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    @Account Closed 

    Also...What better example of "wealth creation" than the wealth created from nothing?  :)

    0Reply
  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    @Ben Leybovich , I always find your posts interesting.... I'd be curious to know more about your backstories and strategies... I'm sure they must be discussed in articles or podcasts somewhere and will make it a point to find out more.

    @Joe Villeneuve and @Ron Averill make interesting points.... Mitigating risk is about safety nets and exit strategies. Cash can be a safety net whether it's in the form of equity, in a checking account, or under a mattress. A partner who has the cash to weather a storm is another safety net. If growing gradually with NMD or OPM, there is time there to build reserves as your business grows, to hopefully make the reserves proportional to what can go wrong before anything does go wrong.

    Having 0% equity and walking away from everything is certainly an exit strategy, although one that would make it hard to get started again if it means a serious hit to your credit and/or credibility.

    @Gregory H. about your friend with the lines of credit, if he had kept an equivalent amount of cash on hand rather than transferring his cash into equity, he could have likewise used it to cover those bad times.

    So I think it's less about NMD vs. equity per se, and more about safety nets and exit strategies, whatever form they might take.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    @Nancy L. "Having 0% equity and walking away from everything is certainly an exit strategy, although one that would make it hard to get started again if it means a serious hit to your credit and/or credibility"

    I've helped people with no cash and no credit get moving.  You just need to know how to execute more than a simple buy/hold or buy/flip entrance an/or exit strategy. 

    0Reply
  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
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    @Nancy L. You would have to be crazy to keep $800K in cash at all times on a $4mil portfolio. If the $800K is sitting in cash and not equity, that means you need to have an additional $800K in debt, at just 4-5% interest per year, you are talking about those cash reserves costing you $30K-$40K per year ... it is much better from a financial standpoint to keep more modest cash reserves and maintain lines of credit to draw down on for special occasions.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Gregory H. 

    unless your LOC gets called... I had that happen to a few of my borrowers.. Were I had to bail them out B/C their LOC's got called and they were counting on those funds to finish projects.. Put some developer types in some pretty tough pickles a few years back.

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  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    @Joe Villeneuve I'd be interested to know more about that? Even just some basic ideas for further reading would help! I have done some projects with little of my own money, but had partners involved so didn't have to do much by way of creative structuring...

    @Gregory H. I actually wasn't commenting on whether it's a good or a bad idea to keep that amount of cash reserve. My point was that it was the access to cash that saved your friend, not the fact that the value was in the form of equity as opposed to in some other form. However, while I agree that it might not be advisable to keep $800K in a checking account, many people have diversified portfolios that contain other types of investments which are more liquid than real estate. 

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  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
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    @Jay Hinrichs Developers are pretty notorious for living large in the bull markets then going bust in the bear markets because they overextend themselves. Obviously not all, but an unnecessarily large percentage. They are also using the LOCs to conduct day-to-day business, where as I am talking about using it as an extra safety net or the occasional quick acquisition when permanent financing cannot be lined up quick enough to be ready at closing.

    @Nancy L. Obviously access to cash is paramount, I'm just saying that having LOCs tied to equity is a much cheaper way to access cash than having cash sitting in the bank. Obviously with that size portfolio you would maintain $50K-$100K in working capital, the LOCs would just be an additional source of funds.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Gregory H. 

    I hear ya loud and clear just wanted to point out the fine print in most LOC's whether they are helocs or true LOC's they can be called at a moments notice.. and many were.. think of all those folks living on their helocs in 08 09 :)

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    I am not sure in what universe 100% financing means no equity.  I've never bough a thing without equity, and I buy everything NMD.  Just a thought...

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    I agree with @Jay Hinrichs - LOCs get called.  And when they do, if they are collatelarized with a blanket, it sometimes forces re-appraisal of all included in the note RE, which is a can of freaking worms...

    LOC is certainly a tool, but you really have to be mindful. Now days, I only work with uncollatelarized commercial "working" lines.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Ben Leybovich 

      that's one thing us West coast guys have a hard time with and that is phantom equity in the mid west and cash flow markets... Property is worth this but I am getting a smoking deal on it so I have instant equity.. Well in my mind if the property is offered to the public in any manner then what you pay for it is what its worth.. and there is no equity.

    Especially if the home has been reno'd or the property reno'd now if your buying something that is a turn around.. IE bad tenants doing work on it etc. then your creating equity.  If an asset is worth X and truly worth X  then why sell for G  and give away equity.. Everything being equal...

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  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Nancy L. - thank you :)

    I put a lot of things out on BP.  There is more stuff on my site :)

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