I remember reading about no-money-down deals and thinking people were completely out of their minds. How could you possibly do deals with no money down? It doesn’t make sense. I know when I go to the bank, they ask me a million questions, want everything but a blood test, look at everything I own and owe with a giant microscope, and then in the end, I will likely be frustrated, tired of the process, and may or may not walk away with a mortgage on a property. And I’ll end up bringing more money to close than I wanted to in the first place.
The fact is, cash and financing are the barrier to entry for a lot of the people wanting to get into real estate investing.
And I’ve learned over time the power is in finding solutions to problems: harnessing your needs, working towards them with desire and tenacity, and creating a solution. Those solutions come in many forms, and it can take many creative steps to put the financing of deals together.
I wanted to think through a few examples of how you could use private money to do your real estate deals that would require little or no money out of pocket, while benefitting all the parties in the transaction. Remember, no matter how awesome the deal is, if it ISN’T a win-win for everyone, it’s not worth doing.
I’d rather sleep at night knowing I did the right thing.
The 20 Best Books for Aspiring Real Estate Investors!
Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.
3 Ways to Fund Deals With Little or No Money Down
Private Finance From Friends/Family Through Self-Directed IRA
Many conversations these days have been about how terrible the stock market is doing and what kind of returns (or lack thereof) people are generating. What if you approached your family members and offered a rate of return of, say, 7-9% where they fund the deal and you run it? Maybe the first one you are going to fix up, live in, save money, have friends or roommates, and have a 2-year window where you flip the house and sell.
They fund it through the self-directed IRA—you have a note and mortgage on the property, they have first lien position. Let’s use real numbers:
Let’s say you buy a HUD or bank foreclosure, and you have first access before investors bid on/buy it. You are shooting to be all in at an 80% LTV, which you have explained to your family a number of times, and you remind them again and again you will get an appraisal, and if it doesn’t meet those criteria, you can either bring some money to the table or move on to a new deal.
- Starter House: $120k ARV
- Purchase Price: $70k
- All In: $95k
- LTV: 80%
- Equity: $25k
In this example you would get the $95k from the self-directed IRA, and you would have a payment (if you did interest only) of $633.33 monthly at 8% interest. Add $150 for taxes and $100 for insurance (just to ballpark it), and you are at $883.33. Have a roommate who pays half of everything with you, and you are in your own place, which is in your own name, with $25k or so equity, for $0 out of pocket, and $500-$600 a month. WAY cheaper than rent.
In a couple years, you can either refi them out, get into a cheaper mortgage, or you could sell, take your cash, and do it all over again.
Hard Money Lender Flip With Equity Back to Lender
One of the ways you can not only get experience, but also get into a deal and have someone who knows what they are doing in the process is that you can partner with a hard money lender who also does flips themselves.
We’ve done this a number of times and have partners local to our market who know the houses, know the deals, and know what they are doing.
You can structure it pretty simply, tell them you will find the deal, they fund it, you guys work the project together, they get paid interest on their funds, and you will receive a percentage of the profit in the deal. If it’s your first few, even if you’re making 25-40% of the deal, that’s awesome. You’re making money, doing a real estate deal, and have NO money in.
Here’s the idea:
$12k Closing/Realtor Fees (ballparked 8%)
= $33k Profit
= You are a 35% partner, and you made $11,550. Cash in. $0.
Private Finance Rental Property
For a rental house, you just need to make sure you cash flow. I also STRONGLY prefer you have some cash to make repairs before you go into the deal—although you can also have some of those dollars come out of the deal as well.
Let’s say you have a lender who will do up to 70% ARV and you have a $80k house. I prefer a lender who will also fund renovation costs and cover those in the note/mortgage as well. You will then fund the deal at closing with the loan and receive proceeds for part/all of the renovation at closing.
After you have closed on the property, you own the house with the private mortgage, you complete your renovation, place your tenant, and cash flow on it. Once you’ve owned it for a while (whatever the lender seasoning is), you could either hold long term with the financing you have, you could sell like the previous example, or refi into more favorable long term financing options that create the best cash flow for you, and hold long term.
- ARV: $80k
- Purchase Price: $45k
- Make-Ready: $8k
If lender allows up to 70%, you have a loan of $56k, $45k for the house, and likely enough to cover closing costs and your entire make-ready on the property, maybe even a payment on the first month’s mortgage.
Don’t allow the fact that you don’t have funds keep you from getting into real estate. Keep asking. Keep learning. Keep finding like-minded people and have the resolve to do what you want to do. Just be willing to keep after it. The more deals you do, the more experience you have, the better and more favorable terms you will have, and the more financing options you will have to do deals.
Investors: Have you used any of the above strategies? What has your experience been?
Let me know with a comment, and let’s chat!