Little to no money down in a hot market?
First off, I have to say that I love biggerpockets.com and the content that it brings. This is a fabulous resource with mostly awesome people on the forums!
I was recently on a blog site reading a post by a guy bragging about his success in real estate and offering advice for others. When people typed him a note asking for help, he slammed their ideas and offered generic advice and suggested that investing their money with him in a syndication was the way to become a successful investor.
One post in particular got to me and it was this:
“I am new to the real estate market and I am interested in purchasing a multi-family in the near future as a buy and hold property (not owner occupied). My wife and I have two very good income jobs but I am interested in purchasing the property with 0 money down. I do not have a private money lender that I can borrow from. What options do I have with purchasing the property with 0 money down and not borrowing from family”
The response back from the original author was this:
“Just to clarify, you have 0 MF(multi-family) experience and you would like to buy your first MF property with 0% down payment. To my knowledge, you have 0 options available for what you are trying to do. I would expect to pay 30% down on your first deal, full recourse. Also, usually when somebody has a very good job, they work a lot of hours. You would be better served by investing passively until you can replace your income. Then buy your first property.”
First, I want to dispel the errors in the author’s response. You have several options to buy with no money down and you do not need to have 30% down and full recourse on multi-family. On loans over $1M, if the property is stable, you could qualify for non-recourse with 20-25% down. Also many local banks will finance with 20-25% down and in some markets they will finance with less than 20% down. Also, passively investing vs. actively investing is a whole different topic depending on what is best for you and what your goals are.
There is a lot of bad advice out there from people that tout themselves as experts and there is a lot of noise from others that pretend to have knowledge. My advice is that if it is ethical, moral and legal, then you can do it and don’t let others stop you from achieving. Bad advice and naysayers are a dime a dozen.
So, can you get into a real estate deal with no money down and little to no experience? You bet! Is it difficult? Absolutely!
Strategy 1 is to find partners. There are a lot of investors that want to do deals, but have no deals. I would consider partnering with someone that brought me a fantastic deal or at the very least pay them for bringing me the deal and there are tons of other investors that would be happy to do the same. If you’re looking to get in the game, get in the corridor. Make sure that you set yourself up for success and what better way than to partner with a successful investor? To go about finding partners you need to be networking with investors and finding out who is doing deals that you are interested in doing and connect with those investors. You don’t need to awkwardly ask if they will partner with you, just get to know them, pick their brains, invite them to lunch, follow up and most importantly get them to know and trust you. When you get a smoking hot deal and put it under contract, then you can approach them to partner.
Strategy 2 is to get the deal under contract and then to raise private funds in the form of a syndication. A syndication is a private offering, like a stock to purchase the apartment building. You sell shares of stock (the building) to your network of investors. This is kind of complex, but a SEC attorney can help you through the process. You will want to have a network of investors that are interested in investing and trust you before you go out and make offers.
Strategy 3 is seller financing through a land contract (contract for deed) or lease with the option to purchase. This strategy is difficult in a hot market and even more difficult if you try to buy the really nice properties in nice neighborhoods. If you find something that needs some work and find an owner that is retiring or doesn’t need the money, then this strategy can work. This strategy also, typically will not get you no money down, but could allow you to get in for less money. I recently bought an apartment building with seller financing at 10% down (he was ok with 5%, but I wanted to have more equity down). This seller rejected my cash out offer because of the price, but liked my seller financed offer at a lower price, because it would give him a good return, plus the mortgage was on the property, so if I didn’t pay he got the property back. When I presented the seller financed offer, I showed him the monthly payments he would be getting and how much additional interest he would make over a 5 year time period. He loved the idea of passive income and took the lower offer, talk about win-win!
Strategy 4 is a seller carry back (2nd mortgage). This is also hard to do, as a lot of banks want you to have 20%-25% down. My suggestion is to make a lot of phone calls to banks to find out which ones are going to be ok with you doing this. Most will still require 10% down. Many sellers are willing to carry a note for you at 10% of the purchase. They get most of their money from the sale and can defer some of the taxes until a later date. This is also a great strategy for sellers that are retiring or not in the business.
Strategy 5 is to have the seller keep 20-25% of the sales price in the deal in exchange for an equity share of the deal. This will take trust and creativity, but will allow for $0 down. In this scenario the seller will sell you a property for $5,000,000 and they will keep $1,250,000 into the deal for your down payment. This will in turn give them equity in the deal (50% or more usually). You could combine this one with step 4 or even step 3.
There are a number of additional ways to get a deal done with little to no money out of your pocket. The key is to ask. There are many people that will tell you no or it can’t be done, but I would guess that they do not try. Nearly every off I submit has 2-3 options that will give the seller the option of getting creative or just cashing out.
Take action, get creative and get it done!