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

132 Replies

@Gregory Hiban  

  depends on the asset.. as Joe is stating and I would agree with his position if I was investing were he invest.. I would shift the risk to the banks ... And want to preserve my cash.. the risk is assets that devalue because of circumstance's outside your control no matter what the cash flow is.

@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.

@Gregory Hiban - 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...

@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

@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.

@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.

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?


@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.

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.

@Gregory Hiban  

  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.

@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!

@Ron Averill  - agreed.  Cash reserves - money on-hand.  This is why I finance 100% of the purchase and keep my money in the bank...

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.

Kristine Marie Poe 

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

Kristine Marie Poe 

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

@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 Hiban  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.

@Nancy Larcom  "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. 

@Nancy Larcom  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.

@Gregory Hiban  

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.

@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 Hiban  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. 

@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 Larcom  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.

@Gregory Hiban  

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 :)

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...

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.

@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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