@Nancy Larcom - thank you :)
I put a lot of things out on BP. There is more stuff on my site :)
@Jay Hinrichs - not at all. Let me give an example:
I bought a 6-unit for $200k a couple of years back. This was a call from an attorney. His client was in Chapter 11 and bank was forcing liquidation. They wanted it sold fast.
There were 2 offers. Mine was clean for $200k, and the other was for $220 but with financing contingency - they took mine.
I suppose that means that there must have been at least 10% equity at the front door. Next - I spent about $12k and the bank appraised the thing for $275k - I refinanced.
The purchase money was all private, sight-unseen - this was "Ben's Deal", as you say. I gave back $170k of it via the refinanced, and re-collatelarized the rest in 2nd on another asset - it's now paid off.
Now - rents are up by a margin since than. Is it worth $275k - who knows. It's a good asset; very stable and I ain't selling - it's not a $30,000 pig :) But, I likely could fire sell it for about $230,000 - $240,000 if need be, which makes my real equity position no less than 25%.
Mind you - this was a NMD deal :)
@Gregory Hiban Agreed. I haven't yet had problems such as where to put that much capital, but if the goal is to have access to a certain amount of cash, my thought would be that a mix of stocks, bonds, and even CD's with staggered maturities, etc. would earn more than the additional interest payments associated with the lower equity. This would be also be liquid enough, more diversified, and avoid any issue with a LOC being called. So a person could have little or no equity and still have a safety net that's just as good if not better.
What I'm wondering about is if ppl who use NMD techniques have other ways of forming safety nets or exit strategies (other than walking away), or if it's a matter of building gradually and growing reserves over time....
I consider that off market deal kind of like insider trading... That someone with your rep can pull off..!! and I guess if I looked at that deal the cost of liquidating it at the time would have eaten up any equity.. so when its within 10 to 15% of market yes it has equity but I don't really perceive it as cash to me.
I go through this exercise almost daily in my every day work a world.. when I get funding requests ...... Now remember a long time hold for me is 90 to 120 days... so when my guys or gals contact me with this great deal that has 25k equity in it.. by the time we run the numbers they realize it has no true equity as a flip... I think that is why many fix and flop they just don't compute the true holding costs and sales costs etc etc.
@Nancy Larcom You don't keep money you need in the short to medium term in stocks or bonds. Either can lose a substantial amount of their value in a relatively short amount of time, then you have to sell at a major loss to maintain liquidity. Staggered CDs might be a viable strategy if we were in a different interest rate environment, but try finding CDs that would be more than the 4-5% interest on mortgage debt.
Hah @Jay Hinrichs - of course it's off market. That's the only way I know to buy anything that makes sense in Mid West. Look - there are a lot of things here that pencil. But, that's it - they "pencil", but in reality, in terms of IRR - they loose over the hold period. Those are on the market...
Quality assets - once you would want to hold because they've withstood the test of time relative to desirability, are very over-priced here. Off market is the only way to get those in a way that makes sense from CF stand-point.
I buy off market...
@Gregory Hiban This is getting a bit off the topic of the post, but it isn't short term unless it's working capital.... The issue I was considering is how best to allocate a large amount investment capital -- leveraged into as much RE as possible, in equity, under a mattress, in some other investment, or some combo thereof -- with the goal of appropriately balancing risk and profit potential. It's not clear to me that the best idea is to allocate a larger percentage to equity. This is a problem I look forward to worrying about after I build a $4 mil portfolio.
One thing we did when I had very Large unsecured LOC's in the millions of dollars.. is we had a clause in the loan docs that if the bank called the loan we had 12 months to repay no matter when the loan was due for renewal.. under those circumstances we were comfortable tapping these lines. We used the money to buy court house steps foreclsoures.
Hah - @Nancy Larcom - you put some of it into a syndicated apartment deal with me...definitely :)
@Ben Leybovich For sure!! :)
@Gregory Hiban Also, just playing devil advocate, because I think most of us on this site have bucked the conventional wisdom on diversifying investments to some extent, but real estate equity is likewise not very liquid, and is also susceptible to turns in the market which would could decrease the investment value. In the case of using equity to sustain business through a RE market downturn, the equity value could be reduced at the exact moment that you need it most. Perhaps some other investment would be doing better at that time. This is of course why the conventional wisdom around diversification is what it is.
@Nancy Larcom This is class A residential in an area that is less susceptible to the boom & bust cycle because it is commutable to NYC, Philadelphia & Princeton. As I said previously, even the financial crisis only caused prices to drop 10-15%. That is nothing compared to what many MSAs experienced in the South & West where property values dropped by 50% or more. Even during this crisis, the $800K wasn't even needed, it just allowed him to sleep better at night, he still was just fine operating on his regular working capital.
Also, he is plenty diversified with other investments and maintains a full time job where he lives on only 1/3 of his income, I was just talking about his real estate portfolio because that is what this site focuses on.
are you talking about yourself :)
@Jay Hinrichs Haha, I wish, but at 25 I can't say I am well enough established to be able to boast about such a portfolio. I was also in college when the financial crisis hit, so my main liquidity concerns at the time were how to upgrade from Coors Light to Sam Adams!
I buy NNN leased commercial property with bond quality credit tenants without coming out of pocket a dime. Net result? In 15 years I own them outright. Do you think I care about cashflow? Nope.
But just to be sure I don't get "beat up" for saying that, they do have positive cash flow.
"Nothing down" in my world means "I walk in with nothing and out with a million dollar property, and cashflow". So yeah, nothing down works just fine.
@Dan Smith Could you elaborate some more on your strategy. How many properties do you have? What kind of tenants are they? what kind of markets are they in? How do you structure the deal with no money down? The vast majority of people here are residential only, so its nice to hear from the commercial side of things.
I just wanted to share that it can be done. I sat down with Excel and some offering memorandums and figured it out, because I HAD TO. Works with 80+% of reasonably priced commercial properties occupied by a CVS, Walgreens, Walmart, Dollar General etc. in the US.
I wouldn't sell the "how" for a million bucks.
@Dan Smith - I do the same with apartments. You go boy :)
The answer is leverage, Highlandville is about 15 miles south of me, any million dollar property will be in my backyard. Dan may be looking out of the area as well. The dime doesn't have to come out of your pocket, so to the "managing owner" type, it's no money in, not necessarily no money down, unless you have the owner finance it and then there is the sale-lease back.
Tax syndications provide for management fees and at the end, ownership. Check out mixed use properties and multi-family under Section 42 of the Tax Code.
@Dan Smith welcome! Hey, fill out your profile, it will help others understand your experience level so they can better relate to your comments and questions. Join the group! What's your profession? I see the ID badge in your pic. :)
@Gregory Hiban that makes sense, whatever he's doing sounds like it's working!
Now that I think more about what I was trying to say, it seems pretty obvious... Having no money, living paycheck to paycheck, would a scary, terrible place to be. Having capital whether it's in the form of equity or something else is the concern. If looking for risk mitigation, likely a diversified, balanced portfolio of equity and other holdings is best.
So if someone has no money, does a NMD deal, and ends up with equity, seems likely that they've improved their financial security. If someone has money, and chooses not to put it into equity, that could make sense too.
I'm not seeing NMD as the issue... I think aggressive, (usually) young, investors with more enthusiasm than sense who use NMD strategies to build their businesses faster than their knowledge, understanding, and safety nets, are more the issue than any one particular strategy.
@Nancy Larcom You are definitely correct that any strategy can work if you have the right combination of knowledge & discipline. My main point has been that the probability of success is much greater among the investor population who puts money down upfront vs the NMD investor population.
Also, I wouldn't necessarily say that a NMD investor has improved their financial security if they have nothing and then they gain some equity after buying real estate NMD. If they have no money, they can easily go from treading water to drowning since all they have is a little equity & no liquidity. If they get hit with some unexpected capital expenditures early on, they'll either have to borrow money very expensively (credit cards) to make the repairs or they may just lose the property. Your scenario only works if the NMD investor creates enough equity through the purchase to enable borrowing off the newly created equity. That is no easy feat and most of the time would require access to off market deals.
Interesting discussion. It brings up many points I debate with myself internally. Up until last year I had not done any NMD deals. I generally put 20-30% down and additional money into the rehab so I have a pretty healthy equity position in everything I bought prior to 2014. Last year I had my reserves (held in both cash AND lines of credit) down fairly low so I wasn't buying much.
Several deals came my way that allowed me to buy with NMD. One was a small portfolio another investor was losing to foreclosure. I approached the owner and the bank and said I would purchase the properties for the amount of foreclosure if the bank would issue me a note for 100% of the amount. They did that because they know me and I have done a lot of business with them and they also secured it with a couple of other properties I have.
The other two situations were financed with an 80% bank loan and a 20% second note from the seller.
The way I looked at these deals is that they add to my portfolio with no cash required on my part but I don't think I would do many more like this in the short run because they have eaten quite a bit of my cashflow. The 20% seconds are only a 5 year note so the payments are pretty high but on the other hand, they will be paid off in 5 years.
All of these properties are rented currently and they all pretty much break even or are slightly cash flow positive operationally, but on the portfolio specifically I have run into a lot of deferred maintenance costs.
I will probably do additional NMD deals but very slowly as I'm just too conservative to take that much risk. If I was young and had nothing to lose I would take as many as I could find :)
To me, "nothing down" is neither a destination or a stepping stone. It's a tool. Before considering a transaction, I merely ask myself, what tools are most needed and most effective for the desired results? For instance, one of my favorite tools is a property control (not ownership) device called a land trust. If constructed properly and mutually beneficial for all parties, one can control real estate for a profit with no money out of pocket while all beneficiaries of the land trust are protected, rewarded and happy. If someone tells me "no money down" deals don't work or are schemes, I just give a courtesy smile and continue cashing checks as do all of my transaction partners.
@Gregory Hiban - would you mind backing up the statement that "probability of success is much greater among the investor population who puts money down upfront vs the NMD investor population"...?
And please don't tell me about the guys you know - I know more guys - most of them highly successful - and for every one who puts money in the deal, I know 3 who do not :)
I promise you - I understand the mechanics better than you, and I have vastly more perspective. I cannot for the life of me figure out how you can make such a statement...
@Ben Leybovich Apparently you run in the top circles of the game. I have not questioned your credentials, nor have I said I know more about real estate than you do. I am talking about the general investor community which includes a wide breadth of investors.
Those at the top of the industry are using other peoples money because they have accumulated enough experience & knowledge to gradually build a reputation in the industry. However, for every one of you and your buddies successfully doing large deals with NMD, there are a ton who try to get creative with their financing & fall flat on their faces.
When you get to investors with 8 or 9 figure portfolios, obviously they have been savvy enough that which ever way they have done it, it worked for them. However, the vast majority of investors are small mom & pop operations with 6 or 7 figure portfolios, and most of them were built with traditional 80/20 financing and slow growth over multiple decades.
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